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Last Updated on October 24, 2021 by Chris Panteli
Today I’m going to take you through the ultimate guide to liquid net worth. While I actively look for any type of investment with a positive ROI (return on investment), whether it’s liquid or non-liquid, my preference is to deploy my capital into any investment vehicle that can generate passive income and is readily convertible to cash.
- What is Liquid Net Worth?
- Why Liquid Net Worth?
- Benefits And Drawbacks of Being Liquid
- Building a Portfolio High in Liquid Assets
- The Three Important Steps to Maximize Your Liquid Net Worth
- A Few Liquid Net Worth Options
- Peer-to-Peer Lending
- Real Estate CrowdSourcing
- Dividend-Paying Stocks
- Should I Be Liquid?
What is Liquid Net Worth?
The term ‘liquid net worth’ in the world of finance and investing means that one is able to quickly convert investment assets into cash in a relatively easy fashion. This is synonymous with the term ‘staying liquid’ or ‘liquidity’.
In my own investment strategy, I do a combination of both liquid and non-liquid assets. While the main source of my net worth is currently my dividend investment portfolio – which is highly liquid as I can sell the securities on the open market – I have owned and do plan to own non-liquid assets, such as real estate, gold, etc. into the future as well.
Today we’ll be going over the various ways I have built a portfolio that is very liquid as well as showcase the ultimate guide to liquid net worth.
Why Liquid Net Worth?
You might be asking yourself why would somebody want to have a liquid net worth over a non-liquid net worth? To me, it really all comes down to the ability to get yourself out of a bad position quickly rather than attempting to sell something that could take months or years to unload. Enter the housing market.
While homeownership is a very desirable thing for many individuals, the 2008 housing crisis exposed the folly of buying into long-term investments without proper due diligence or long-term thinking.
Many homeowners bought a very illiquid asset – real estate – in the hope that the market would continue its meteoric rise and they could eventually sell higher. Mr. Market proved otherwise. In the rapid decline of the home values, many homeowners found themselves underwater – a situation where the current value of their home was less than what they owed on it.
This means that a homeowner, who took on a $300,000 mortgage, might still owe $290,000 on the mortgage even though the current market value of that home had fallen to $225,000.
Being that real estate is illiquid – meaning it cannot be readily converted to cash – many of these homeowners found themselves in a situation where they had to enter into a short sale on the property.
A short sale is when a homeowner comes to an agreement with the bank to sell a house for less than what the amount is due to the bank. In these situations, the bank usually takes a write-off, and the seller is either left owing money to the bank or at least with a tarnished credit score.
Now, this does not mean that real estate is not a good investment – in fact, it is one of the best investments out there; after all, they are not making any more land. Rather, this example is to show how an illiquid asset can get an investor into challenges if the market turns south.
Contrast this to a liquid asset such as a stock, where there is an open market and investors can trade in a matter of milliseconds if the need arises. So long as someone is on the other side and willing to take the trade, the stock can be bought or sold. This is an example of a very liquid investment. Keep in mind though, liquid investments do have their drawbacks as well.
Benefits And Drawbacks of Being Liquid
- Flexibility – Can buy/sell at a moment’s notice.
- Realized Capital Gains – Can realize capital gains quickly if needed.
- Passive Income – A solid form of passive income generation through appreciation, dividends, etc.
- Increased Volatility – liquid assets that are subjected to price discovery tend to shift price much more frequently than illiquid assets.
Building a Portfolio High in Liquid Assets
Building a portfolio of liquid net worth is not only possible but very beneficial to the everyday investor. My personal preference is to be diversified in both liquid and non-liquid assets, though at the moment my overall financial picture consists nearly all in liquid assets. If needed, I could liquidate my entire portfolio at a moment’s notice.
The Three Important Steps to Maximize Your Liquid Net Worth
There are three primary steps to building your liquid asset portfolio. None of these are revolutionary, as nearly all good principles have existed since the beginning of time. If you practice the steps below, you will see your liquid net worth grow!
Step 1: Maximize Your Earning Potential
It all begins with making as much money as you can. It goes without saying that accumulating capital is a very important part of the journey towards building your liquid net worth. Do whatever it takes – work multiple jobs, begin a side hustle/gig, ask for a raise at work, etc. Be creative here; remember the sky’s the limit.
Step 2: Control Your Expenses
Secondly, you must control your expenses. Without doing so, it will be challenging to realize a high enough savings level to actually make a difference towards building your liquid net worth. Remember the age-old principle – spend less than you earn and invest the rest!
Step 3: Put Your Extra Money To Work
Once that you have mastered step one and step two, it is then time to really get rolling on your liquid net worth portfolio. You do this by taking that extra capital and putting it to work for you in various investment vehicles.
A Few Liquid Net Worth Options
In today’s market, it’s dangerous to be in cash. That is because the interest rate paid on cash deposits is so low and inflation is poised to run high. Therefore, we need to find alternatives to cash that are potential options for deploying our capital.
None of the information in this article is investing advice – each person needs to do their own due diligence as to the risks of each investment vehicle before choosing to deploy their hard-earned capital.
The first liquid net worth option is Peer-to-Peer (P2P) Lending. On these platforms, investors with capital can contribute their own money to microloans. These get then lent out to individuals seeking out loans for various reasons – house improvement projects, business loans, etc.
Currently, I invest in Prosper. It’s been a decent return on investment for my capital, earning me close to 8-11% per year. I typically choose the higher grade, lower-risk loans, though if investors like, they can choose the lower grade, higher risk loans that pay much higher interest. Overall the returns have been adequate and a nice place to put money aside each month.
Real Estate CrowdSourcing
The second option for liquid net worth is real estate crowdsourcing. Similar to P2P lending, you take extra cash, put it into real estate projects, which then will pay back dividends to you as the project progresses.
Currently, I put money aside into Fundrise. It has been an ok investment – the returns have not been as high as I would have liked to see – around 4-5% – but overall it has been an adequate place to place my extra cash funds.
Dividend-paying stocks are the method I utilize the most to build my liquid net worth. For me, dividend stock investing has just made sense – the idea of investing in the greatest companies in the world and as they succeed, so do I through dividend payments.
Though my ultimate strategy is to buy and hold forever, I do like the fact that if needed, I can liquidate my positions at a moment’s notice. There is security in knowing that I have flexibility when it comes to my investments is calming.
Check out: The MoneyByRamey Dividend Investing Learning Center.
The last area where my liquid net worth is growing is via Cryptocurrencies. I do not have a lot of my net worth into these asset classes, but I do have enough where it is fun to watch the ups and downs of the markets. For now, I am planning to hold these coins long-term and to eventually see if the investment pays off.
If needed, I can liquidate these coins on the open market at a moment’s notice. The liquidity of such investment certainly is rife with Beta, but the potential gains are well worth it.
Should I Be Liquid?
Overall the decision of which assets to own is up to each individual investor and their financial planner. For myself, I have seen the advantages of maintaining a portfolio high in liquid net worth. Though the beta tends to be higher for a liquid portfolio than a non-liquid portfolio, the ability to trade in and out of positions brings about a certain type of serenity.
I do tend to accept the inherently increased fluctuation risk in the liquid portfolio as I keep all of my positions on auto-reinvestment, which helps me practice dollar-cost averaging.
How much of your portfolio is liquid vs. non-liquid? Will a liquid portfolio work for you? Get the conversation started by commenting below or sending me an email.
Matthew Ramey is the owner and operator of MoneyByRamey.com. He teaches money management, investing (especially in dividend-paying stocks), and how to achieve Financial Freedom through developing more active and passive income. He is the author of two books; Simple Budgeting and Simple Investing, which can be purchased on Amazon.