One of the most crucial things to remember when pursuing financial prosperity and improving your financial wellbeing is diversification. Adding more highly liquid investments to your financial portfolio is one way to diversify. 

With liquid investments, you can increase your wealth while maintaining easy access to your money. You can track and improve your net worth over time with liquid assets, rather than locking all of your money in one inaccessible investment opportunity.

What Does the Term “Liquidity” Mean? 

Understanding liquidity is essential to fully grasp what liquid investments are. Liquidity refers to having enough readily available assets that can be quickly converted into cash. For example, your liquid net worth is calculated by adding up all your liquid assets and deducting all your liabilities.

However, in exchange for a larger possible return, an illiquid investment would require you to forgo frequent or easy access to the money. It might also mean that you could lose money if you liquidate the investment during a temporary decrease in value.

Investing in Highly Liquid Assets 101 

As you know, liquid investments are those that can be quickly and easily converted into cash with little to no loss in value. Highly liquid investments, therefore, are simply assets that can be swiftly and easily turned into cash.

Highly liquid assets may also be referred to as cash equivalents. This is because most people feel confident in their ability to quickly and easily convert their liquid assets into cash whenever needed. However, liquid investments are not just the same as cash.

Elements of a Liquid Investment 

For an investment to qualify as a highly liquid investment, several conditions must be met:

• The asset needs to be traded on a well-known, liquid market.
• The asset must continue to attract a large number of interested and available buyers.
• The asset should hold its value and be easily and safely transferable.

Why is It Vital to Invest in Highly Liquid Assets? 

You have probably heard about the importance of investing in retirement accounts, which is distinct from liquid investments, if you have read anything about personal finance and how to build your finances for the present and the future. 

While building up your retirement funds and making wise investments to save for retirement should undoubtedly be your top priorities, you also need to consider the present. Highly liquid investments are crucial if you want to be prepared for the near future.

Investing With Minimal Risk in the Near Future 

Having liquid investments allows you to cover your living expenses immediately. Additionally, they provide a comfortable cushion to help you budget for any unforeseen expenses. When saving for a short-term financial objective, liquid assets are an excellent tool. 

This means you can gradually increase your savings while maintaining easy access to the money you will need soon. They also provide a low-risk way to learn how to start investing. 

How Far Off is the Near Future? 

If you plan to use the money in your assets within three years, liquid investments are an excellent choice.

Highly liquid assets are an excellent choice for saving for events like a wedding, a deposit on a new home, or an emergency fund because of the easy access to cash they provide. 

The Drawbacks of Extremely Liquid Investments 

Remember that diversification is the fundamental rule of investment. You should not rely entirely on liquid investments to grow your wealth, even though they can be highly beneficial and should undoubtedly form a part of your overall investment portfolio.

What’s the Deal With Highly Liquid Investments? 

The more liquid an asset is, the more its value will decrease over time. Consider that you are saving money for a significant purchase in the near future. One of the most liquid investment options is cash, which you might decide to keep some of your money in. However, cash will eventually be unable to keep up with inflation. 

As time passes, its purchasing power will inevitably decline. Because of this, saving money alone isn’t enough to help you prepare for retirement; you also need to make smart investments across a range of asset classes.

It takes a variety of assets to develop long-term financial health and increase your wealth over time. These assets include highly liquid investments such as cryptocurrencies or passive real estate investing, among others. 

Like any financial decision, access and risk must be balanced. You will need to determine for yourself which portion of your portfolio will be allocated to liquid investments.

11 Investing in Highly Liquid Versus Short-term Highly Liquid Assets

Naturally, not every liquid investment is created equal. Some assets are more liquid than others. Highly liquid assets and short-term highly liquid assets are two examples. The primary variable with liquid investments is the time to conversion, which simply indicates how quick and easy it is to turn an asset into cash. An asset is considered more liquid if it can be easily converted into cash.

Short-term, Highly Liquid Accounts and Assets

Access to short-term, highly liquid assets is convenient and quick. You can keep them as investments for a longer period of time if you prefer, but they can be converted to cash in a year or less.

1. Money 

Among short-term highly liquid assets, money is the most liquid. You can keep actual currency or access it conveniently via ATM withdrawals. The drawback of using cash is that it does not keep up with inflation, as you will not earn any interest. 

2. Treasury Bonds and Bills 

Treasury bills, also known as T-bills or T-bonds, are highly liquid investments and rank among the most stable types of bonds due to being backed by the US government. You will receive interest on the bond if you hold onto it until its maturity date.

However, they may also be sold sooner if you need money immediately, which makes them quite flexible.

3. Certificates of Deposit With No Penalties 

Are you unsure of what a certificate of deposit is? It is a relatively risk-free method of using your bank to earn interest while saving money. You earn interest when you keep your money in the account for a predetermined period of time. 

You can typically earn higher interest rates on certificates of deposit (CDs) than you would on a regular savings or checking account. The drawback? Withdrawing funds from a CD before its maturity date is typically more challenging.

However, if you invest in a no-penalty CD, you won’t have to pay a penalty if you withdraw your money early, making it more accessible as a highly liquid short-term investment.

4. Exchange-traded Funds 

Instead of investing in the stocks of a single company, you can purchase stocks from numerous companies using exchange-traded funds, or ETFs. Remember, though, that ETF volatility is equivalent to that of the market. 

When it comes time to sell your ETFs, you never know what they will be worth. However, you can freely sell them whenever you need cash; that is, ETFs can be sold from 9.30 a.m. to 4 p.m. EST every trading day. Therefore, they are a valuable option for liquid investments.

5. Money Market Funds 

These mutual funds are designed for making short-term, highly liquid investments. Money market funds are favoured by investors because they offer considerable liquidity with very low risk, making them an excellent choice for short-term savings requirements. 

A money market account is a type of savings account that enables you to earn income; however, money market funds are not the same as money market accounts.

6. Fixed-rate Current Account With Interest 

Cash is the most liquid asset, with current accounts being the second most liquid. While current accounts are not typically the best investment vehicles, there are several that offer interest.

Consider them if you need access to money but don’t want to forgo the opportunity to earn interest—some offer as much as 5.3% APY.

7. High-yield Savings Accounts; Highly Liquid Investments 

Although it will be slightly less liquid, a high-yield savings account will nonetheless offer a high interest rate. For instance, banks could limit how many withdrawals you can make each month. However, you can still find many accounts with a competitive APY, and withdrawing money from this type of account is still relatively straightforward.

Highly liquid assets and accounts for a medium to long term Although they may not be as swift as those mentioned above, mid-to long-term highly liquid assets and accounts can still be accessed quite promptly and easily. They should be considered as they are a valuable component of an all-weather or diversified portfolio.

8. Certificates of Deposit 

CDs are a fantastic choice for a highly liquid investment, as we know well. You may opt for a standard CD over the no-penalty CD if you do not require a highly liquid, short-term asset. A CD’s terms could range from six months to five years.

The duration before you can withdraw your money from the CD can be pre-set. You can obtain a respectable APY on CDs—occasionally up to 5.35%!

9. Individual Shares 

Although individual equities are among the most volatile assets, they are also among the easiest to liquidate. This means that if you have to sell your assets while the stock market isn’t performing well, you may incur losses. It is essential to develop the skill of stock research before you begin investing. 

Stocks are not the safest option for building an emergency fund due to their volatility, but they remain a crucial component of creating a diversified portfolio, particularly when liquid investments are involved.

You can open a brokerage account, select a robo adviser, or consult a financial expert to commence investing in company stocks. Moreover, there are numerous stock options available, including mutual funds or exchange-traded funds (ETFs) and individual equities.

10. Funds (Mutual and Index Funds) 

Many investors favour investing in mutual funds and index funds as they provide a straightforward way to diversify investments. A fund pools your money with that of other investors to invest in a collective sum of bonds, stocks, and so forth.

The downside is that mutual funds and index funds only trade once a day at market close, making them slightly less liquid than equities or exchange-traded funds (ETFs). It’s also well known that index funds generally offer lower management fees than mutual funds.

11. Precious Metals 

Precious metals are a less conventional investment option, yet they can vary in liquidity. Several factors, such as storage location and accessibility to dealers for exchanging them for cash, will determine their liquidity.

Ensure you’re comfortable with the level of risk before making any financial decisions. Take some time to assess your risk tolerance. Are you at ease with riskier investments such as stocks, or do you prefer low-risk options like bonds, CDs, and high-interest accounts? 

While a diverse portfolio of assets is desirable, you must first ascertain which ones are suitable for you. 

When is It Suitable to Pursue a Liquid Investment? 

It’s prudent to pursue a liquid investment if you might require quick access to the money. Hence, whether you’re saving for a significant purchase or aiming for quick access to cash for your emergency fund, these investments are the optimal choice. 

They should be integral to any financial planning strategy. Nevertheless, it’s also prudent to consider illiquid investments, as they may offer higher potential returns. 

Which Investment Boasts the Highest Liquidity? 

Cash stands as the most liquid asset in your possession, and the investments with the highest liquidity that retain cash while ensuring high liquidity include money market accounts, bonds, interest-bearing accounts, no-penalty CDs, and ETFs. While you can swiftly withdraw funds from any of these and they all yield interest, some are more volatile than others. 

Which Investments Are Liquid and Which Are Not? 

The ease of withdrawing your money from an investment determines its liquidity. Investing in liquid assets facilitates easy access to cash. Non-liquid ones have associated fees in certain situations and are more challenging to withdraw from. 

In non-liquid investments, such as real estate, you might have to settle for less money than you would have preferred at the time of sale if you’re thinking, “I need money badly.” Additionally, obtaining cash will take longer.

Then there are assets that are not liquid, or illiquid. Even though they can comprise a substantial portion of your overall portfolio, illiquid assets are difficult to cash in on or sell without suffering a loss. Collectibles, estates, and other intangible assets are a few examples of illiquid assets. 

Are Liquid Assets Better? 

Liquid investments make more sense in some situations, such as when you need the money right away or are unsure of when you’ll need it. However, non-liquid investments are also valuable, particularly for long-term capital growth, and a diversified portfolio should include both types of investments. 

What Does Being Highly Liquid Actually Mean? 

When an investment is very liquid, it can be quickly converted to cash without causing you to lose money. Your money should be returned to you in a convenient and timely way. If you wish to earn interest while still having constant access to your money, it makes sense to hold highly liquid assets.