Liquidity not the answer for long-term growth
Last week I talked about liquidity…that nice circumstance where you can easily cash in the investment you own when you need it and won’t take a dive right before you do. The conclusion: With few exceptions, you find liquidity in a bank. Yes, the returns aren’t good, but at least you get back what you put in and you get to take it out when you want.
But is that what you really want?
Let’s take a house. Even after the recent housing crisis, most people still think it’s really swell to own a home. Oops…don’t they realize that a house is not a liquid investment? I mean, if they sold it soon after buying it they might take a loss, even if the market was not down (those pesky sales fees). Not only that, but as I understand it getting cash out of a house in a day or two is considered a miracle, not a normal occurrence. No, a house is not a liquid asset, and no one cares.
Why? Because folks don’t buy a home figuring they will be leaving it in a few months. They don’t expect to be able to sell it in a few weeks when the time comes. And they don’t fret when the housing market takes a dip since they’re probably not selling then anyway—not that they’d notice. After all, how many of you get your house appraised daily to try to spot the trend and get out when the getting is good?
Yes, that’s ridiculous. But if you substitute the word “stock” or “mutual fund” for “house” it sounds like something people do all the time. This is why many won’t consider equities of any sort for their investments. They want liquidity. And stocks aren’t liquid.
So let’s look back to last week’s column at what liquidity is: The ability to cash in your investment when you want without a loss. That is a wonderful feature to have when investing for that car you’ll buy in a year or two. It is a good way to describe the money you save to cover your potential medical deductibles or a way to pay for the refrigerator that needs replacing. But is it really a good feature to have for your retirement money or for your elementary school-age child’s college savings?
Okay, it would be wonderful if all your savings and investments could be liquid. This issue is more what you give up for liquidity. Liquid assets protect you from short-term losses and are essential for immediate needs, but the trade-off is lower returns. Liquid investments are lucky to keep up with inflation and taxes.
Here’s your takeaway for the last two columns: Liquidity is good—vital even—for your short-term savings. But for longer-term investing, like your house, it’s unnecessary and you’d give up too much return to make it worthwhile.
This article was published under the title "Liquidity won't lead to growth" in the Wichta Falls Times Record News on June 7, 2015.