Liquidity’s Role in an Investor’s Portfolio

Every investor has their own version of liquidity. Some will stay massively liquid, others will stay massively illiquid.

One of the single greatest variables in how much of your portfolio to keep liquid and how much to keep invested is your investment style.

Some investors play for long-term returns on safer investments. This likely means that they keep a smaller % of their assets liquid.

Others play a more short-term game. They may have some long-term investments as well, but a large portion of their activities indicate that they are looking for gains in the near-term and this requires that they keep liquid funds to jump on an opportunity when they see fit.

I am thinking about this today as I was finishing up some end of year spreadsheets for some investments and also considering how I will proceed into 2020. I tend to keep a large portion of my assets illiquid.

The vast majority of my portfolio is invested in illiquid assets. Things that I don’t expect to sell for years on end. This is not a bad thing in itself, but it does mean that when I find certain opportunities, I have a lag time for jumping on them.

This lag time can be restrictive. While it’s nice to continually earn a return from my investments thanks to dividends and “other income”, it is similarly nice to be able to take advantage of opportunities as they arise.

Lately, I’ve been seeing more opportunities come my way. Especially as I dive back into the world of options.

Whether it’s a crypto arbitrage play, an options spread for an earnings call or moving money into a long-term asset for an income-based return, I have opportunities in front of me. It’s important for me (in this time period) to keep a higher % of my portfolio in liquid assets.

The way I see it, my liquid capital is simply bullets in the gun. The capital I deploy against opportunities that have a great deal of potential. These are not long-term investments.

Long-term investments are like a savings plan. You put the capital in there and then you forget it exists for a while. You let it grow. You don’t micro manage it.

The liquid capital… the bullets in the chamber… are ready to go. They are pre-loaded and ready to be fired at a moments notice.

Last week I saw 3 incredible options plays. I had the ammunition (the capital) ready in my account as I waited for the right conditions. On each of these 3 occasions, I managed to have the bullets loaded and I pulled the trigger on the investments at the right time.

The first yielded a 30% profit.
The second yielded 15%.
The third also yielded 15%.

Not bad for a week’s work. This past week has reaffirmed my belief in measuring your “bullets in the chamber” and keeping a constant awareness about your investment opportunities as they relate to your liquidity.

Measure your liquidity. Keep that figure at the forefront of your investing activities. Adjust as the tides turn and opportunities arise.

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Comments 9

Does this require research ?

08.01.2020 03:27

According to the Bible, How should a Christian deal with peer pressure?

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08.01.2020 03:30

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08.01.2020 03:41

One thing that important to understand about liquidity, these volatile markets can create liquidity environments with lots of slippage. However, without volatility risk. losses and profits aren't possible.

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08.01.2020 05:49

Good point. There are so many variables when it comes to liquidity and I think a lot of people tend to skip over the process and analysis that is required. Where we house our liquid funds and how we do so are very important, especially with market conditions like today's. I read somewhere recently that the average American can't come up with $400 cash on a moments notice...

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08.01.2020 23:06

how about short term bullet for crypto, any particular setup/condition?

08.01.2020 12:39

It depends on the person and their goals for it. In my scenario, I'm looking to have long-term exposure to cryptocurrency for the upside it could have in the next 1-20 years. I also want to be able to trade in and out on a moment's notice to take advantage of short-term price fluctuations. Thus, my breakdown looks something like this:

  1. A large % of the "crypto" portfolio is held in actually cryptocurrencies that I believe will have long-term value. STEEM, BTC, ETH, BAT, etc.
  2. A smaller % of this same portfolio is held in USD or USDT which is ready to be converted into crypto when an opportunity arises to make a quick play back/forth
  3. Another small allocation remains in BTC and is to be traded against ALTS that I like when the time is right. I.e. I just converted some BTC into STEEM recently as the satoshi valuation is low in the short-term

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08.01.2020 23:09

for part 2, any particular type of setup/opportunity or conditions as you mentioned that you are looking out for ?

for part 3, i m doing the same too, thought of holding months back but notice that steem/btc have the pattern of spike and dump, so just set the orders for spike and look to buy back lower.

09.01.2020 14:36