What Is Liquidity?

No, liquidity has nothing to do with water, beer, or any other fluids. When talking about investing, liquidity refers to the ease at which you can exchange an asset for money. As you may have guessed, some assets are more liquid than others. Naturally, cash has the highest liquidity. You can easily exchange cash for practically any legal good or service, and businesses and official institutions are almost always obligated to accept the local currency as payment for whatever they sell or provide.

Unless there is some sort of apocalypse that completely erases national governments and monetary institutions, cash will remain the most liquid asset in the foreseeable future. Real estate, on the other hand, has much less liquidity. Selling a house can take months or years. Even a home equity loan can take a while to procure, so you may not be able to access your property’s value without waiting for a long time and jumping through several hoops.

Most bonds cannot be sold until the end of their term, and stocks only sell when an interested buyer comes along. In short, liquidity varies between assets, and the liquidity of any individual asset can quickly change. No matter how much you invest, you want to be sure to have enough liquid assets on hand to comfortably cover your regular expenses and handle any emergencies.

Understanding Inflation

Inflation is going to be mentioned a lot throughout this guide, so it’s a good idea to quickly run through what it is and why it matters so much. In short, inflation is when average prices rise. Consequently, a single unit of currency won’t be able to afford as many goods or services as time passes. If your assets aren’t growing at a rate that outpaces inflation, then you are effectively losing money every year.

For example, five years ago, $15 may have been enough to fill your shopping cart with two loaves of bread, two pounds of cheese, and three gallons of milk. Now, it may cost $20 to buy the same amount of groceries. If you just keep your money in a regular bank account, then the meager interest from that account won’t be able to compete with the rate of inflation.

So, why does inflation happen? Inflation has occurred throughout history, but it’s so common these days because modern currencies are not backed up by any commodities. When governments want to stimulate the economy or manipulate the money supply, they can use a few simple tools to effectively print as much money as they want.

Due to the economic principles of supply and demand, as the supply of something increases, its value generally decreases. Therefore, when more dollars are put into circulation, a single dollar loses some of its value. In the United States, inflation hovers around 2% every year, but that can change with unforeseen economic conditions. In some other countries, inflation is much higher, and their respective currencies may be much more volatile. However, even if you use a more stable currency, inflation is still almost guaranteed, so you need to make investments that grow faster than the rate of inflation.

Don’t Overlook Precious Metals

Precious metals continually outpace inflation, and they tend to be much less risky than stocks, bonds, and other investments. In fact, throughout the history of human civilization, most currencies have been tied to gold, silver, copper, and other useful commodities. This often kept prices stable and prevented extreme inflation.

However, in the modern era, no national currencies are based on precious metals. Instead, they’re based on the full faith and credit of their users. Although this makes it logistically easier for governments and institutions to deal with money, it also leads to inflation and instability. Still, even though governments don’t use precious metals as legal tender anymore, precious metals are very valuable, and they are more liquid than many other assets.

Microprocessors and other small electronics rely on gold’s great conductive properties to operate efficiently. Without gold, many modern digital devices may not have ever been feasible to develop. Computers, smartphones, and other electronic devices are becoming more and more common across the world, so demand for gold bullion is projected to increase dramatically in the coming years. Other precious metals have various industrial applications, and they are also expected to grow in value over time. There are tons of precious metals companies that you can do business with.

Gold Will Keep Your Portfolio Safe

Over the past 20 years, the price of gold has increased by over 600%. Meanwhile, general prices over that same period have risen by about 50%. To put that into perspective, a dollar’s worth of gold twenty years ago would cost about seven dollars today. However, a dollar today can only buy 66% of the goods that it could have afforded two decades ago.

These examples clearly show how gold is a great way to make your money grow at a rate that outpaces the natural tendency for prices to rise. While some stocks and investments may rise at a greater rate, they are extremely hard to predict, and there is a lot more risk involved. However, aside from its steady growth potential, gold also has many other distinct advantages.

First and foremost, gold is an extremely liquid asset. While you can’t outright buy a candy bar at the convenience store with a little chunk of gold, you can convert it into cash in a matter of minutes to purchase whatever you want. Stocks will only sell when a willing buyer comes along, and you’re bound to bonds for months or years. Real estate may sometimes sell quickly, but it can also take a very long time to find a committed buyer.

On the other hand, you can find reputable gold buyers almost anywhere in the world. Even small towns have storefronts that happily trade gold, so if you want to sell your gold, then you only need to make a short drive to the nearest buyer. When you own gold, you have more control over your finances, and you can always liquidate your gold when you need funds at a moment's notice.

Gold will also allow you to remain independent of online trading platforms. Several online trading websites and apps exist, but you can’t be sure that they’re all secure. Hackers and criminals keep getting better at what they do, and a single security breach could potentially compromise your portfolio. In contrast, gold is kept in a physical place, so you don’t need to worry about cybersecurity and other complex matters when dealing with it.

Before investing in gold, some people worry about space. However, unless you’re investing billions of dollars, your gold will easily fit within a space that is smaller than your car’s glove box. As long as you have a good safe and remain subtle about the gold that you keep in your home, it is an extremely practical and secure asset.

To top it all off, gold is incredibly easy to understand. With stocks and other investments, you have to constantly check the news and analyze the market to make sure that you buy and sell at the perfect times. Gold, on the other hand, doesn’t require nearly as much micromanagement.

You don’t need to be a finance whiz to know that your gold’s value will continue to grow over the years. As a result, you can take a very hands-off approach with your investment. Most experts say that it’s fine for gold to make up around 20-50% of your portfolio. However, if you are investing with the distant future in mind, then it’s alright to let gold take up a bigger proportion of your total assets.

Are Silver and Other Metals Smart Investments?

Silver is much more volatile than gold, though it has seen regular growth over the past century. If you like to speculate and make a quick buck, then silver isn’t a terrible investment. However, since the market is more volatile, you stand to lose more by buying and selling at suboptimal times. Furthermore, silver is much less value-dense than gold, so you’ll need a lot more space to store it.

Palladium is a bit more expensive than gold, but demand for it is expected to rise, and it’s quite stable. Since most of the world’s palladium is mined in Russia and South Africa, you should research geopolitical matters that are relevant to those countries before you invest.

Like palladium, most of the world’s platinum supply comes from Russia and South Africa. However, platinum prices are much more volatile, so investing in this metal isn’t for the faint of heart. Nonetheless, investing in a variety of precious metals is a good way to hedge your overall portfolio against unexpected shifts in the market.

Be Careful With Coins

Many people who are new to precious metals think that coins are the way to go. However, the coin market is entirely different from the bullion market. For all intents and purposes, you can think of coins in the same way that you would think of baseball cards. They’re collectibles, so they are affected by very unique market factors.

For example, a coin that was minted during the reign of a specific European monarch in a certain year may be very rare today, so it would be worth a ton of money. However, if someone were to find a huge collection of that kind of coin hidden in an old castle somewhere, then that coin wouldn’t be nearly as valuable. In turn, the price of the coin would drop.

These kinds of things happen quite often, so the coin market is extremely unpredictable. Moreover, many scammers try to sell fake coins to unwitting collectors. Because of this, if you’re going to trade metal coins, then you should consult with a registered numismatist before spending any money.

Also, unless you’re super interested in obscure history, collecting coins might be a very boring endeavor. If you really want to invest in collectibles, then you should probably put your money into something that you’re more passionate about. However, due to the unpredictability of collectibles, you probably don’t want to make them a serious aspect of your investing strategy.

Stocks

Stocks are also known as shares or equities. When you invest in a stock, you’re effectively buying a small share of ownership in a company. Depending on the company and how many shares you have, you may even be able to vote on certain matters related to the company’s operations. Furthermore, you may receive dividends at regular intervals.

However, most investors make money in the stock market by buying and selling stocks at strategic times. To make the most money, you should buy a stock when the price is low. However, you should only do this when you think that the price will rise in the future. If a stock’s price is diminishing because the company is going to fail, then you should abandon ship as soon as possible.

If you’re confident that the price will climb, then buying at a low point will give you a higher profit margin when you sell the stock at a high point. Of course, these things can be extremely difficult to predict. Therefore, it requires a lot of research and dedication to avoid losing a ton of money on the stock market.

The value of a company's stock is mostly based on the public’s faith in the company. For example, a smooth-talking CEO may convince investors that their new product will take the world by storm. As a result, their stocks may skyrocket in value. However, that CEO can’t be certain that their product will be as popular as they predict.

If the product fails upon entering the market, then the value of the company’s stocks will plummet. Consequently, investors who bought the stock near its peak will take a huge financial hit. While the stock could recover, it might take years for investors to regain that lost value, and there’s no guarantee that the company would rebound to that extent.

Stocks are risky, and some stocks are riskier than others. The right stocks can make you rich overnight, and the wrong stocks can seriously damage your portfolio. Therefore, the best way to invest in stocks is to spread your money across several companies and industries.

Naturally, that will require more research and dedication, but it will protect you against massive losses when one stock or sector underperforms. These days, many investors allocate up to 80% of their portfolios to stocks. However, you can invest less if you’re not willing to accept that much risk.

Bonds

When you buy a bond, it is like you are giving a loan to the company or government that issued the bond. They will pay you interest at regular intervals throughout the bond's life cycle, and they will pay back the principal investment at the end of the term. Each bond has its own terms and conditions, so you have to pay close attention to the details before purchasing a bond.

However, once you buy a bond, you just need to wait until the company pays you back when the term is over; you don't have to worry about micromanagement. Naturally, bonds still bear some risk. Secured bonds are backed by collateral, so the company can pay you with its liquidated assets if it goes out of business. Other bonds are unsecured, so if they go out of business, then you will receive nothing.

Furthermore, some bonds’ terms extend over several years. While you may think that the bond’s interest rate is good when you buy it, inflation and general interest rates may change over the years, so you may not get as much value out of the bond later in its life. Generally, you should only buy bonds from companies that you believe will withstand the test of time.

Cryptocurrencies

Cryptocurrencies have taken the world by storm, and they're the subject of a lot of hype and many clever memes. However, the crypto market is no laughing matter. Bitcoin, Litecoin, Ethereum, and several other cryptocurrencies have all been lauded as the next big thing at one point or another, but their prices are all very volatile. If you’re interested in speculation, then it’s fine to put a little money into cryptocurrencies, but you shouldn’t invest more than you are willing to lose.

If you tend to travel internationally, then cryptocurrencies may have some practical applications. Sometimes, banks erroneously block travelers’ debit cards when they make purchases abroad. Without an alternative way to access your funds, this can be very unnerving and troublesome.

Thankfully, most cities across the world have cryptocurrency ATMs. As long as you have a smartphone, you can easily scan a code and convert your cryptocurrency into the local currency in a matter of seconds. This can allow you to access your wealth from anywhere on the globe without being at the mercy of your bank’s automated fraud detection system.

Also, more and more vendors support cryptocurrency payments for goods and services. This makes certain cryptocurrencies extremely liquid, and this can be a big selling point for some investors. However, cryptocurrencies are still relatively new, and governments are constantly updating laws and regulations around cryptocurrencies and their use. Therefore, it’s difficult to determine whether or not cryptocurrencies will be viable in the long run.

Beware of Short Selling

Short selling can be very lucrative, but the risk is almost unlimited. When you short a stock, you are basically borrowing a certain number of stocks from a broker for a certain amount of time. At the end of the term, the broker sells the stock for its price at the time of the agreement, and you have to pay them back at the current price. Therefore, people short stocks when they expect the value to drop; that’s how they make a profit.

For example, you might think that General Motors stocks are going to rapidly decline in value. For the sake of simplicity, let’s pretend that a share of General Motors costs $10. Since you’re so confident in your prediction, you decide to borrow 100 shares at that price. By the end of the term, the price of the stock has dropped to $5.

Per the contract, the broker still sells the stock at $10 per share, so you end up with about $500 in profit. In this example, $1,000 is the most that you could possibly make from the deal, and that’s because the value of the General Motors Stock could only possibly decrease by $10. After all, a stock can’t have a negative value.

Now, let’s pretend that you were completely wrong, and the price of the stock drastically rose. If the stock's value were to increase to $11 by the end of the agreement, then you would owe the broker $100. That would be unfortunate, but such a loss wouldn’t bankrupt you. However, theoretically, there is no limit to how much a stock's value could rise.

If the price somehow skyrocketed to $1,010 per share by the end of the agreement, then you would suddenly owe the broker $100,000. Hedge funds that employ huge teams of the best investors have lost billions of dollars due to bad short positions. Therefore, you shouldn’t try shorting stocks unless you’re willing to risk losing a lot of money.

Foreign Exchange Market

If you live in the United States, then you probably use the U.S. Dollar for the overwhelming majority of your transactions. However, the U.S. Dollar won’t take you very far in China or Norway because they use their own respective currencies. Like stocks, currencies constantly increase and decrease in value. Some currencies are more stable than others, but no currency is going to maintain the same value forever.

Because of this, you can make a hefty profit by exchanging currencies at strategic times. If you think that the value of the Vietnamese Dong is going to shoot up, then you may want to exchange your U.S. Dollars for Vietnamese Dong while the exchange rate is favorable. That way, you can buy more Vietnamese Dong with fewer U.S. Dollars.

Once the price of the Vietnamese Dong increases, you can exchange it back for more U.S. Dollars than you had originally spent. Thus, depending on your initial investment, you can come out of it with a hefty chunk of change. However, the value of any currency is affected by a multitude of factors. For example, something as unpredictable as a tsunami can severely damage a currency's value.

Because of this, there is no guarantee that exchange rates will change in a way that benefits your portfolio. As a regular trader, you probably shouldn’t allocate more than 10% of your portfolio to the foreign exchange market. Forex trading is just too risky to make up a huge part of your investing strategy.

Purchase Real Estate

In most parts of the world, property values continue to climb. Consequently, when you buy property, there’s a good chance that you will be able to sell it at a higher price in the future. Moreover, if you get a mortgage at a good interest rate, then you may be able to rent out the property and pay your mortgage with your rental earnings. However, being a landlord can be very difficult. Not all tenants are reliable, and you’ll be responsible for maintenance, repairs, security, and many other expensive obligations.

On top of that, several unforeseen factors can affect property values. For example, if you buy a home in a booming industrial town, then your investment’s growth is heavily dependent on the health and actions of local businesses. If those businesses do well, then the area will become richer, and demand for real estate will rise. In turn, your property will become more valuable. However, if the local businesses suddenly decide to set up shop somewhere cheaper, then property values will plummet, and you may not be able to find a buyer.

Mind Your Tax Obligations

You have to pay taxes on almost every little bit of income that you earn, and investments are no different. Depending on the nature of your portfolio, your taxes may be very difficult to understand. Therefore, you need to consult with a reputable tax preparer to ensure that you’re fulfilling your tax obligations while taking advantage of all relevant credits and benefits.

Work With a Professional Financial Advisor

If you have hundreds of thousands of dollars to invest, then you can afford to pay a financial advisor. A financial advisor can work with you to set up an effective budget and optimize your portfolio for your unique investing needs. Unless you are an expert investor, a financial advisor is worth the relatively small cost, and they will help you better understand your options and avoid expensive mistakes.

Watch Your Wealth Grow

Getting into investing may seem a little intimidating, but with the right tools and a little knowledge, you can manage your money in a way that will allow your wealth to expand. Without the right investments, your money will not grow at a rate that outpaces inflation. Therefore, to secure a brighter future, you need to maintain a diverse portfolio that will grow in value over time, and by investing in gold, stocks, and other investments, you can make your money work for you.