What Is an Advantage of Liquidity?

When it comes to versatility, cash is still king in the finance world. The liquidity in an account expands the range of options available to owners, from individual bank accounts to investment management. Though liquid holdings rarely earn anything but low interest rates, they typically make up for it by maintaining a concrete value and accessibility.

Significance

The liquidity of an account translates to the readily available cash on hand for withdrawal. When referring to individual assets, liquidity refers to the time required to sell an investment in return for cash. In some cases, investment managers consider assets with settlement dates of one or two business days to be liquid assets. The liquidity an individual holds varies based on investment strategy, financial planning goals and risk management.

Security

In an unexpected event or tragedy, liquid assets provide a safety net. According to Bankrate.com, an emergency savings account ideally holds three to six months of living expenses. Cash holdings provide the benefit of universal acceptance, low risk and the added benefit of almost immediate access in the event of an emergency. Those who wish to earn interest on their savings may invest in money market funds and bonds, which can be classified as liquid assets due to their short turnaround time. However, these assets must be sold to generate cash, generally adding one to three days before cash is available for withdrawal.

Flexibility

Liquidity provides financial freedom in the form of buying power. Liquid assets in an account provide account holders with immediate access for a large or small purchase. Investors and consumers holding cash can act quickly to get a good deal on everything from clothing to real estate. Low cash reserves restrict the opportunity to act.

Allocation

Investors often allocate a percentage of their portfolio to liquid assets. Cash holdings are resistant to the ups and downs of the stock market and can provide balance for riskier investments. A percentage of liquidity reduces the overall risk of a portfolio, acting as an asset class that holds value. Some investors choose to keep larger chunks of cash in a portfolio when searching for new investments. In this scenario, the liquidity provides individuals with the option of buying stock or funds when the time is right.

references