Understanding different types of assets is an important element in the process of creating a financial plan for your business or personal life.
So just what are liquid assets and non-liquid assets? We took a closer look at the differences between these two, and the importance of each as part of your investment portfolio.
What's Ahead...
What Are Liquid Assets And Non-Liquid Assets?
Put simply, liquid assets are those that can be quickly converted into cash. Examples of liquid assets include savings accounts, money market accounts, certificates of deposit (CDs), stocks and bonds, mutual funds, and exchange-traded funds (ETFs).
These types of investments are considered liquid because they can be sold quickly and easily for cash.
Non-liquid assets are those that cannot be easily converted into cash. Examples of non-liquid assets include real estate, vehicles, jewelry, art, antiques, and collectibles.
These types of investments are considered non-liquid because they cannot be sold quickly or easily for cash.
They may require more time to sell and the sale price may not reflect the full value of the asset.
The importance of liquid assets is that they provide a source of immediate cash when needed. This can be especially important in times of financial hardship or emergency.
Non-liquid assets, on the other hand, are typically used as long-term investments and can help to diversify your portfolio. They may also provide tax benefits or appreciation over time.
What Are The Advantages Of Liquid Assets?
As we have seen, liquid assets have a number of advantages, and these include:
- Easier Access To Cash
Liquid assets can be quickly converted into cash, which can be used for a variety of purposes.
This makes them ideal for emergency situations or when you need money quickly. Higher Returns
Liquid assets typically offer higher returns than non-liquid assets. This is because they are often more liquid and can be sold quickly for cash.
- Lower Risk
Liquid assets are generally considered to be less risky than non-liquid assets, as they are not subject to the same market volatility as other types of investments.
- Diversification
Liquid assets can help to diversify your portfolio, as they provide a source of liquidity and stability.
This can help to reduce the overall risk of your investments, as holding a mix of liquid and non-liquid assets can help to diversify your portfolio and reduce risk.
- Tax Benefits
Liquid assets may also offer tax benefits, as some types of investments may be eligible for certain tax deductions or credits.
What Are The Disadvantages Of Liquid Assets?
While liquid assets have many advantages, there are also some potential disadvantages to consider. These include:
- Lower Returns
Liquid assets typically offer lower returns than non-liquid assets, as they are not subject to the same market volatility.
- Inflation Risk
Liquid assets are subject to inflation risk, as the value of money can decrease over time. This means that the value of your investments may not keep up with inflation.
- Limited Investment Options
Liquid assets typically offer fewer investment options than non-liquid assets, as they are limited to cash and cash equivalents.
This means that you may not be able to access certain types of investments, such as stocks and bonds.
Liquid assets are an important part of any financial plan. They provide a source of immediate cash when needed and can help to diversify your portfolio.
However, it is important to understand the advantages and disadvantages of liquid assets before investing in them.
By understanding the risks and rewards associated with liquid assets, you can make informed decisions about how to best use them in your overall financial strategy.
What Are The Advantages Of Non-Liquid Assets?
Non-liquid assets are typically used as long-term investments and can help to diversify your portfolio.
They may also provide tax benefits or appreciation over time, and offer a range of advantages, including but not limited to the following:
- Higher Returns
Non-liquid assets typically offer higher returns than liquid assets, as they are subject to the same market volatility. This means that you can potentially earn more money from your investments over time.
- Tax Benefits
Non-liquid assets may also offer tax benefits, as some types of investments may be eligible for certain tax deductions or credits.
- Appreciation Potential
Non-liquid assets can appreciate over time, meaning that their value can increase due to market conditions or other factors.
This means that you could potentially earn more money from your investments in the long run.
- Diversification
As is the case with liquid assets, non-liquid assets can help to diversify your portfolio, as they provide a source of stability and long-term growth potential.
This can help to reduce the overall risk of your investments, as holding a mix of liquid and non-liquid assets can help to diversify your portfolio and reduce risk.
What Are The Disadvantages Of Non-Liquid Assets?
Non-liquid assets can be a great way to diversify your portfolio and potentially earn higher returns.
However, as with any investment, there are also some potential disadvantages to consider before you leap in. These include:
- Higher Risk
The same market volatility that makes non-liquid assets a high-reward investment option can also make them a higher-risk option.
This means that you could potentially lose money if the market takes a downturn.
- Liquidity Risk
As the name suggests, non-liquid assets are not liquid, or accessible, and this means that it may take longer to access your funds or convert them into cash.
This can be an issue if you need to access your money quickly in an emergency.
- Longer Investment Timeframe
Non-liquid assets typically require a longer investment timeframe than liquid assets, as they are subject to the same market volatility.
This means that you may need to wait longer for your investments to appreciate in value, and they are therefore not really suitable for short-term investments.
Which Is Better: Liquid Or Non-Liquid Assets?
Ultimately, the decision of whether to invest in liquid or non-liquid assets is a personal one, and can depend on a variety of factors, such as your risk tolerance, investment goals, and financial situation.
It is important to understand the advantages and disadvantages of both types of assets before making any decisions.
In general, liquid assets are better for short-term investments, while non-liquid assets are better for long-term investments.
In summary, liquid assets are those that can be easily converted into cash, such as stocks, bonds, and cash equivalents.
These assets are typically used for short-term investments and offer quick access to funds in an emergency.
Non-liquid assets are typically used as long-term investments and can help to diversify your portfolio.
They may also provide tax benefits or appreciation over time, but they come with higher risks and liquidity issues.
Ultimately, the decision of whether to invest in liquid or non-liquid assets is a personal one and should be based on your individual financial situation and goals.
It is always good to ensure that your investment portfolio contains a combination of types of assets and investments – so that you can benefit from the advantages of both liquid and non-liquid assets.
This will help to ensure that your portfolio is well-diversified and can provide stability in times of market volatility.
Additionally, it is important to remember to regularly review your investments and make any necessary adjustments as needed.
Final Thoughts
Liquid and non-liquid assets are both important components of a well-diversified portfolio.
It is important to understand the advantages and disadvantages of each type of asset before making any decisions, as well as to regularly review your investments and make any necessary adjustments.
Ultimately, the decision of which type of asset is best for you will depend on your individual financial situation and goals.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.Â
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.