Liquidity

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DEFINITION:

Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.

WHEN AND WHY IT’S USED:

Liquidity is a key factor when evaluating investments, as it indicates how readily an asset can be sold in the market. It becomes especially important in times of financial emergencies or when unexpected expenses arise. Investors use liquidity measures to ensure that a portion of their portfolio can be quickly converted to cash if needed.

In addition, liquidity is considered when balancing risk and return. Investments that are highly liquid typically offer lower returns, while less liquid assets might yield higher returns but at the cost of accessibility. Understanding liquidity is essential when planning both short-term needs and long-term investments, ensuring that you can meet obligations without selling at a loss.

IMPORTANCE IN COMMUNICATION:

Discussing liquidity with your financial advisor ensures that you have a clear understanding of how easily you can access your funds. This conversation helps assess whether your portfolio has enough liquid assets to cover emergencies or short-term goals. It also clarifies the trade-offs between investing in highly liquid versus higher-yield, less liquid assets.

Open dialogue about liquidity is key to ensuring that your investment strategy is both resilient and flexible. It allows you to plan for contingencies and ensures that your advisor is aware of your need for accessible cash. This discussion supports a balanced portfolio that aligns with both your immediate and future financial requirements.

EXAMPLES IN CONVERSATION:

“Are my investments liquid enough to cover unexpected expenses?”

“How does liquidity factor into our current investment choices?”

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