Investing in equities, bonds or property can offer a good opportunity of growing your money over the longer term. A normal investor can be expected to be comfortable with such investments. Just because you’re a long-term investor doesn’t mean you have to buy one stock or one bond to stay invested over the long term, there are many more options that you could take a look at, like those at
SoFi.
The future is always uncertain. It is therefore better to hold some liquid investments such as cash or an account, such as a regular savings account, that can be withdrawn and converted back into cash, as needed.
This article is intended as general advice and information and should not be taken as investment advice. Use your own financial circumstances and circumstances where applicable when making decisions. The article should not be relied upon for investment purposes other than those permitted by law.
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One strategy is to allocate your cash balance every year to one asset or asset class (stocks, bonds, property) and invest the rest in a diversified portfolio of low-risk assets. With the higher total returns and returns that these investments achieve, you will have time to earn a greater portion of the returns before losing your entire investment.
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Pros and cons of liquid investing vs. stable investments
Liquid investing has higher potential returns and lower potential volatility than stable investments. These higher returns and lower volatility mean that a liquid investor can generate a higher expected total return and income over time. There is no such thing as risk-free investing.
But there are also downsides to holding liquid investments, such as the need for greater liquidity. Liquid assets usually have less liquidity which results in higher volatility. Liquid assets may be less liquid than their stable or volatile counterparts. Although it does not take much time to transfer a steady amount of liquid assets from one account to another, it takes longer to fully liquidate a highly liquid asset (such as shares in a large company).
Liquid Assets
One is unlikely to be able to earn the same average returns on a liquid asset as one who holds an equally liquid stable investment such as equities or bonds. The average return a liquid investor can expect on a single liquid investment over the long-term is higher (after tax) than the expected return of a stable investment. For example, liquid assets can generate roughly three times the annual return of equities as compared to bonds, three times the annual return of property as compared to equities, and over 4.5 times the annual return of cash as compared to equities. These are expected to be accurate estimates based on historical returns and the general factors that tend to influence investment returns.
The additional returns from liquid assets come from the fact that they often perform better in value terms and in volatile markets.