Investments Versus Liquidity

[Jack Jones]

Lets consider investments to be money we give to other people in the hope that it grows, and liquidity to be the money we set aside to ensure we can meet our day to day obligations “whatever the future brings”.

From this lens, stocks are investments and bonds, cash, and gold are about liquidity, right?

Could we be conflating these two concepts when we combine them in ratios that result in 25% devoted to investments and 75% devoted to liquidity?

Maybe it’s better to consider one’s liquidity needs first, make the appropriate arrangements with cash, gold, and bonds to shore that side of one’s life up. Then any remaining can be devoted to investing in retirement accounts.

Why combine investment concerns and liquidity concerns in the same portfolio, and at this particular ratio (25% investing, 75% liquidity)?

[ArthurPooh]

Lets consider investments to be money we give to other people in the hope that it grows, and liquidity to be the money we set aside to ensure we can meet our day to day obligations “whatever the future brings”.

From this lens, stocks are investments and bonds, cash, and gold are about liquidity, right?

Could we be conflating these two concepts when we combine them in ratios that result in 25% devoted to investments and 75% devoted to liquidity?

Maybe it’s better to consider one’s liquidity needs first, make the appropriate arrangements with cash, gold, and bonds to shore that side of one’s life up. Then any remaining can be devoted to investing in retirement accounts.

Why combine investment concerns and liquidity concerns in the same portfolio, and at this particular ratio (25% investing, 75% liquidity)?

Hal has recently put it in a similar way, but he considers bonds an investment too; thus he has described the PP as half investment, half savings.

I wouldn't necessarily think the "savings" part is just for day to day liquidity. Rather, I would opine there are two necessary parts of an investment plan: one that is primarily for generating purchasing power, and one that stores it. Sure, these parts do not have to be equal - Warren Buffets' 90-10 portfolio comes to mind as an investment-heavy way of implementing the same concept.

Think of it this way: if you ran a small company as an owner-operator, it would make sense to reinvest most of your earnings into it, at least as long as there's room for expansion. However, it would be quite stupid not to save something on the side, to have somewhere to draw from when it's faltering, and to still preserve some wealth even if your company goes bankrupt.

[xmj]

I think you may be confused by T+2 here.

Investing is about duration. Knowing you won't need some amount of funds for a given period (N days, months, years, perhaps decades).

By that token, I consider even some of my "cash" funds "illiquid" (I could, theoretically, sell them; I just don't plan to).

Conversely: Liquid is what's in the checking account or can be accessed immediately through a line of credit.

[barrett]

Lets consider investments to be money we give to other people in the hope that it grows, and liquidity to be the money we set aside to ensure we can meet our day to day obligations “whatever the future brings”.

From this lens, stocks are investments and bonds, cash, and gold are about liquidity, right?

I would never consider gold and bonds (beyond, say, one-year maturities) to be about liquidity. Their value is just way too volatile for that purpose. The other concern for meeting day-to-day obligations is not just actual liquidity but also tax consequences. Of course, in that sense, maybe any asset that can be quickly sold could conceivably contribute to liquidity if, say, it made sense to sell something at a loss to offset income or gains elsewhere.