What is liquidity?
Liquidity means how easily an asset or investment can be converted into cash. If an asset can be easily bought or sold in the market at a price close to its true value, it’s considered liquid.
Which assets are liquid, and which ones are not?
Cash is of course the most liquid asset. Some other examples of liquid assets are stocks, bonds and gold. On the other hand, assets like real estate, art work and collectibles are illiquid.
What should be the proportion of liquid and illiquid assets in my investment portfolio?
Liquidity is only one of the factors you should consider while making an investment. But in general, if you don’t need the money back for a long time, you can invest in illiquid assets like real estate. If you need the money sooner, the investment should be in liquid assets such as Certificate of Deposits or CDs.
Remember, your emergency fund should always be held as cash or invested in very liquid assets like Money Market Funds.