Best Liquid Investments and Why You Should Consider These

What Is a Liquid Investment?

Having a liquid asset is generally seen as the same as having cash. That is because you can easily sell it without getting a discount on its market value. For an investment to be considered liquid, it needs to have these three characteristics:

• It has to have an established market;
• It needs to have a large number of interested buyers;
• It needs to be easily transferable.

The most basic type of liquid asset is cash, as it is the most easily accessed asset. But there are many other types of liquid investments that you can use to generate wealth without committing to locking up your money for a long period. Any instrument that can easily be converted to cash is considered a liquid investment. The level of accessibility, however, can vary a lot. Some are accessible whenever you wish, while others have a small period in which you can't convert it to cash.

Best Cash Equivalents

More often than not, cash equivalents are investments with short-term maturity periods of less than 90 days that can be easily converted to cash. There are many types of cash equivalents, but, in exchange for liquidity, the interest rates of this type of investment can be lower than non-liquid assets. When the potential returns of liquid assets are high, they are usually riskier assets too. So here are the best cash equivalents based on accessibility, potential returns, and risk involved.

Savings Accounts

Since you can access the money in it whenever you wish. Another positive aspect about savings accounts is that they are extremely safe, especially since most of them are insured by the Federal Deposit Insurance Corporation (FDIC). The interest rates vary a lot between traditional savings accounts and online savings accounts. At their best yielding models, traditional savings accounts offer interest rates only above inflation. Online savings accounts, however, usually pay higher rates, going up to 10% in some cases.

Money Market Accounts

These types of accounts offer liquidity too; since you can withdraw the money you invested easily. However, different from savings accounts, money market accounts usually impose a limited number of withdrawals per month. This restriction can consider the number of transactions, dollar amount, or both. In terms of risk level, money market accounts are also recognized as safe havens that are insured by the FDIC. The interest rates of this liquid investment are good, more often than not above inflation. It is important to highlight that money market accounts usually demand a minimum deposit and balance, so you will need to have a considerable amount of money to put in it.

Stocks

Are considered liquid assets because, in case of a financial emergency, you can easily convert them to cash by selling your shares on the stock market. The potential returns of stocks can be very high. But as usual, with high returns comes high levels of risk. Depending on which stocks you choose, it can be a risky investment.

US Treasuries and Bonds

Not always considered liquid assets, since many of them have very long maturity periods. However, some of them do mature in less than 90 days. Naturally, the US treasuries and bonds that are considered cash equivalents tend to have lower interest rates than the longer-term ones. The good side of US treasuries and bonds is that they are usually quite low-risk investments. The US Treasuries, for instance, are backed up by the US government.

Mutual Funds

Another form of investment that offers good liquidity. Mutual funds consist of a managed portfolio of investments with money from various investors. This money is pooled and then invested in an assortment of different financial securities such as stocks and bonds. Even though the investment would be made by a fund manager instead of you, mutual funds still offer great liquidity. Generally, if you request access to your money, you will have it in a few days. In terms of risk, you usually can choose if you want your investment to be more conservative or not. Therefore, the risk level will depend on the profile of investment you go for.

Cryptocurrencies

such as Bitcoin and Ethereum, are somewhat like digital cash. Due to that, it is only natural that they are considered very liquid assets. The risk involved in crypto is quite high because it is an extremely volatile and speculative market. On top of that, cryptocurrencies are very new and experimental, so the future of this industry is still quite unclear. On the bright side, the potential returns can be extremely high. The advancements of decentralized finance also provide new services based on cryptos that offer low risks. The returns are not as high but are still quite good. For example, crypto-saving accounts can pay interest rates as high as 12%.

Should I Invest in a Liquid Asset?

The answer to this question will depend on many factors. There is no one-size-fits-all strategy in finance. What does exist are the characteristics of liquid or non-liquid assets which you can analyze and conclude which one - if not both - fits better your goals. Some objectives don’t fit cash equivalents formats, while some needs require the investment to be liquid. It is about understanding what you can afford, what you need, and your goals.

Thus, the key aspect that will push you towards investing in liquid assets is if you need or want easy access to your money. Accessibility is probably the most in-your-face advantage of liquid assets. Offering easy access to your capital is not only one of the premises of liquid assets but also the most attractive trait of it. Everyone wants to grow their money, or at least don’t lose the value of it for inflation. However, not everyone can afford to have a significant amount of money on the side without being able to access it if they need to. In some cases, even the investment has a trait that makes accessibility the whole point of it. An example of this is emergency funds, which exist for the sole reason of having cash in case something unexpected happens.

Another point of view on accessibility is, for example, if the market crashes. If you have money in stocks, you will be able to sell them and convert them to cash, even if for a lower value. If having this assurance that you will be able to access your money if needed is important to you, you may consider including liquid assets in your investment portfolio.

But liquid investments are not always the perfect fit. They do have some disadvantages and, depending on your goals or financial situation, you should also consider non-liquid assets. If you are looking for safe investments that offer higher interest rates, for example, non-liquid investments would offer it more often. Cash equivalents with high returns tend to be riskier types of investments.

Some popular non-liquid investments are real estate, land, art, private equity, certificates of deposit, and long-term bonds. These are usually harder to liquidate and convert into cash. In some cases, you need to find buyers interested in your asset to be able to cash out. In other cases, you will have to wait until the end of the maturity period to access your cash investment. Due to that, they offer less accessibility, but can still be great investments with longer-term results.

The bottom line is that you should consider your goals, needs, and priorities before investing in liquid or non-liquid assets. One thing we can say for sure is that diversification is key. You should always try to invest in different types of assets to spread risk and optimize your earnings.