How Liquid Are Your Investments
Just how liquid are your investments? If you don’t know the answer to that question, it’s time to find out.
Many people evaluate their investment options by how much return or growth they can reasonably expect and fail to look at the other important factors. In addition to asking how safe your investments are you should also be asking how liquid they will be.
According to investopedia.com, the definition of a liquid investment is “an asset that can be converted into cash quickly and with minimal impact to the price received”. For an asset to be considered liquid, it needs to be bought and sold in an established market with enough participants to absorb the sale without significantly impacting the price.
So why is the liquidity of your investments so important? For one, if it cannot be easily sold or if your money is “locked in” somehow, you may not be able to access it when you need it. If there is not enough volume to absorb your intended sale without impacting the price, you may be forced to either hold onto something you no longer want or alternatively sell the asset for less than it’s supposed to be worth. Either or both of these issues can have a significant impact on your investment portfolio’s value and your income needs.
To help illustrate how the lack of liquidity can be an issue I’m going to highlight a couple of local examples that I’ve seen recently:
A colleague of mine recently met with a client who had the bulk of his RRSP holdings in a Mortgage Investment Corporation (MIC). The client decided that he wanted to withdraw this money and sent in a request to the MIC organization to do so. At first, they were told that all redemption requests were being compiled and that in a “couple of months”, they would be able to redeem the money as long as they “had enough”.
A few months went by and the client finally heard back – they were told that there was “no money to give back at this time and they would look at it again next year”. The client was completely shocked and confused and a letter from the MIC president stated how dire of a financial situation that they are currently in.
All this time while the client was invested in the MIC, he assumed that this money was his and that he could access it if needed. Now he finds out that he can’t get at it for some time and he may possibly never see his money back unless the MIC can somehow turn its business around quickly.
A second example is an ill-fated development project well known in the South Pandosy area of town. I’ve met with several individuals who “invested” $200,000 of their hard-earned money in 2011 to buy a “bond” to help finance this joint residential and commercial development. After the original developer ran out of money, a second developer took over.
While they had expected to be paid back roughly $250,000 in March of 2013, the second developer also failed to finish the project and it ended up in front of the courts. 20 months after they had expected to be repaid, the courts finally accepted a lowball offer from a third developer to take the project on.
Where did this leave the investors who’d each put in $200,000? You guessed it; they were too far down the list of those owed money and ended up with $0.
If an investment looks too good to be true it probably is. Think of a MIC invested in mortgages that pays the investor 10 per cent per year and claims to be in “safe mortgages just like yours”. What do you pay in interest on your mortgage, maybe three per cent? The math just doesn’t add up…
So what should you learn from all this? In addition to researching what type of returns you might earn and how risky an investment is, make sure to also ask how liquid it will be. Your hard-earned money needs to be safe, secure and accessible when you need it – and there is no reason why you should accept anything less!