A helicopter pilot told me how much cooler his aircraft was because he can go anywhere and land anyplace. He has ultimate flexibility. I agreed a helicopter is a wonderful tool for the mission that it’s designed to do, but if that pilot and I jumped in our respective aircraft and headed off to Dallas, I would have had lunch and gotten in a round of golf before he would have touched down. The engineering design that allows a helicopter to land vertically, also makes it difficult for the thing to go very fast. With flying there are always trade-offs.
Having the right tool for a job is also critical in investing. People often ask their financial advisors to do a job for them, but then deny them the proper tools. Much like telling a pilot you want to go to Dallas in a hurry, and then insisting he take you by helicopter. One tool I often see investors reject without fully considering its potential value is the tool of illiquidity.
Our country today is awash in liquidity. For evidence, ask your bank how much interest they would pay you for a $100,000 deposit, fully liquid. The rate they offer will likely start with a decimal point. Now tell them they can keep the money for five years and watch the rate jump up towards 2% (bankrate.com). That’s about a 20-fold rate increase on the same dollars just by giving up some liquidity.
We all want liquidity but some investments cannot tolerate it. Imagine for a moment you want to open a restaurant with a partner, but your partner demands full liquidity of her investment. That condition would very likely make the partnership unworkable.
In the public investing world, many successful investments are illiquid as well, and yet some investors will routinely reject an illiquid investment because they want full liquidity. I understand we have an emotional attachment to cash money. We love to have it in our hands. We want a big pile of it under our bed. But many people keep far more of it liquid than they will ever need. This unnecessary need for liquidity, as in my example with the bank, can actually deny us the potential returns many illiquid investments can offer.
I view retirement money as the goose that lays the golden eggs. Where possible, you want to spend the eggs and avoid eating the goose. Illiquidity can help protect the goose, especially if, in the process, it results in more eggs.
Like a helicopter, a liquid investment can be very flexible, but it will also have its own limitations. Decide how much liquidity you reasonably need, then don’t be afraid to tie up some of the rest of your money in illiquid assets. If you aren’t going to spend it anyway, then being liquid may be robbing you of potential opportunities.
We need to get past this idea that illiquidity is inherently undesirable and recognize that sometimes it may be just the right tool for the job.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 1173 S. 250 W. Suite 505, St. George, UT 84770.
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