It is often said in investment, that asset allocation is key. This means that it is asset allocation that drives the performance of any portfolio of investments. When taken at a higher level, there are indications that many portfolios are allocated between liquid and illiquid investments. But what are liquid and illiquid investments, and what are the differences? When the word “liquidity” is used in investment, it simply means the ease or ability to turn an investment asset or security into cash without losing much of its value. In essence, cash is the most liquid of all investment assets, while real estate property is almost the most illiquid.
The fact that cash is the most liquid, while property is the most illiquid, implies that there is a wide range of degrees of illiquidity or liquidity among asset classes. While treasury bills are very liquid, long term bonds are not as liquid, especially if they are long term bonds of companies that are either unknown or are financially unstable. Treasury bills and long-term bonds are both fixed income securities, but one is more liquid than the other. In the same way, publicly-traded equities are more liquid than private equities. That means that even among same asset classes or types, degree of liquidity differs.
Risks of investing Illiquid assets
Asides the fact that an investor may not readily convert the value of an illiquid asset to cash as at when required, there are other risks that go with illiquidity. Because the holding period of illiquid assets is longer than that of liquid assets, an investor is exposed to increased volatility, fluctuations in interest rates and changes in economic conditions, among other risks. In addition to that, an investor has a higher opportunity cost with illiquid assets because he or she will have to tie down his or her money in the illiquid asset for a longer time.
Importance of Liquidity in Investing
Given the dynamic nature of stock markets around the world, there is no gainsaying the fact that liquidity matters. One of the benefits of liquidity generally is that it leads to pricing transparency, which helps in valuing assets. On the other hand, liquidity offers investors the flexibility they need to trade on their assets.
The price of investing in Illiquid assets
If illiquid investments are not easily convertible to cash, why would anyone be interested in such assets, as an investment. The reason is that those who have the risk appetite and tolerance to invest in illiquid assets and the patience to wait for those investments to come to maturity or fruition, get compensated, oftentimes handsomely. This compensation is what is called liquidity premium. There is liquidity premium in most investments but it is more pronounced in illiquid assets. For example, when you look at a typical yield curve, you will discover that a normally shaped yield curve is upward sloping.
This means that bonds that have longer maturity and are therefore less liquid than short maturity bonds, compensate the investors with higher interest rates or yield. This is because longer-dated bonds carry higher risk and rewards investors for the added risk with the added yield, just like illiquid assets carry higher risks than liquid assets and as such, rewards investors with some liquidity premium. It is these added or magnified investment risks which call for higher liquidity premiums that an investor should demand when investing in illiquid assets.
Illiquid assets are good for diversification
It is often said that portfolio diversification is better achieved when assets that are not perfectly positively or negatively correlated are held together. Therefore, the low beta and low correlation between publicly-traded securities and illiquid assets makes investments in illiquid assets good ingredients of investment diversification. Investments with low beta, help cushion volatilities that emanate from the mainstream markets. Correlation is a statistical measure of how two or more variables move or change in relation to each other, while beta is a measure of the relationship between changes in the stock market and other investments.
The need for proper Asset Mix
It may be tempting to invest in illiquid assets like property, gold, vintage cars, stamp collections or artefacts, because of the premiums that come with them. It may also be tempting to shy away from them because of the additional risks involved. That is why some investors try to strike a balance in their asset allocation or asset mix between investing in liquid and illiquid assets. It is advisable to keep a portion of your investment in liquid assets so that they are at your beck and call, whenever you need to convert them to cash. It is also advisable to have some assets in illiquid assets so as to take advantage of the premiums that they generate.
Is Illiquid Investment good for you
Though I have noted that illiquid investments are good to have in a portfolio to achieve a good asset mix and diversification, it may not be good for every investor. It is good for those investors that have high-risk tolerance, high-risk appetites, high rate of return expectations, and with long investment horizon. Remember, invest according to your risk chemistry.
How to build solid financial success system and achieve financial freedom quickly
These are the three systems you need to speed up your financial success by almost 20 times.
The majority of people I know want to increase their financial success. If this is also what you want to do, you need solid financial systems.
What systems do you need and how do you increase financial success especially if you are stuck in a 9-5 job? In this article, I will show you exactly what to do.
To increase your financial success, there are three systems you need. These systems determine how fast or slow you achieve financial freedom and are explained below.
Multiple Income System
This is the system that brings in massive money into your life. It comprises 3 main components – quality of your main income, source of your income, type of income.
The quality of your income can be high or Low. It is high if your main income gives you the ability to save more than you spend. It is low when you can only spend more than you save. High-quality income is the only type of income that can make you rich.
The second component of the multiple income system is the source of your income and there are two types – the one source income and multiple source income. The key to fast-tracking your financial success is to upgrade your source of income from one to many.
The third component of the multiple income system is the type of income you earn. There are two types of income – active income and passive income.
When you earn only active income or have a weak passive income, you limit your chances of financial success. True success is created when you have a strong active income and a strong passive income. You accelerate your financial success when you depend on passive than active income.
These are the three components of the multiple income system. When you have all three components working for you, you accelerate your financial success by almost twenty times.
So, now that you know the first system for fast-tracking your financial success, let’s look at the second system.
Money Preservation System
Earning extra income is just one step in the financial success process. What truly creates wealth is the income that you keep. True riches are created when you keep more income for yourself.
Unfortunately, this is rarely the case. Most people are only keeping leftovers for themselves. They are enriching others through their spending and getting poorer and broke every day. To achieve financial success, you must preserve more of what you earn. To succeed with preserving income, you must maximize two key components – the savings component and investing components.
The savings component works best when you save big portions of your income every month and investing your savings to produce solid passive income. To save big portions, you must strive to increase your savings by 1% every month. You must also try to maintain a low maintenance living standard.
The second thing to do to preserve your income, is to ensure that money saved and invested is never lost. Losing money through unguided investment decisions is not wise. To achieve financial success, you must invest to preserve your savings.
So, now that you know the second system that can accelerate your financial success. Let’s look at the third system.
Money Multiplication System
The money multiplication system is the system that enlarges your wealth. There is a limit to which savings and investing alone can make you rich.
This is because they are heavily dependent on your own direct effort. To create massive wealth, you need to move beyond your effort and create systems that can enlarge wealth even in your sleep. To create this kind of system you need one critical component – Leverage.
What is Leverage?
The best way for me to explain leverage is to use the example of a school Teacher and a movie star. A school teacher solves the problem of ignorance through education and a movie star also solves the problem of ignorance and boredom through education and entertainment.
Both teach their audience something about themselves or other people, that they do not know before. A teacher delivers her services by standing in front of a few students and is confined to a classroom. Every day of her life she does the same thing, teaching the same materials to different kinds of students.
Without her presence, her work cannot be delivered, her time is blocked. She is cut off from the wider society and can only earn income from her direct effort. Although, the teacher arguably provides higher perceived value than the movie star, she lacks leverage and her income is limited by it. This, therefore, means that you can provide enormous value and still not be rich. Value alone does not lead to wealth. It is value and leverage that creates massive wealth.
The movie star in contrast has massive leverage. He shoots a movie in some remote town unknown to the audience. He invests weeks, months, and sometimes years producing the movie. But, once produced, he never has to do the same movie over again. The movie produced is distributed all over the world. He is seen on all the media platforms, in theatre, television, and DVDs.
His movie is watched by billions of people. He is able to build a solid fan base and is patronized from all over the world. A movie star works once and is paid for a lifetime. It is the long-lasting and far-reaching value of the work of a movie star that makes him richer and wealthier than the classroom teacher. Thus, even with little perceived value, a person can create massive wealth with the right leverage.
Leverage is thus the ability to work once and be paid for life. It also the ability to do it in one place and spread it all over the world. The tools that make leverage possible is the right relationships, the right media platform, and the right distribution system. If you do not build your own leverage system, there is a limit to how much money you can earn.
Explore Data on the Nairametrics Research Website
So, these are the three systems you need to speed up your financial success by almost 20 times. Perhaps, you are thinking to yourself how do I build these systems and where do I start. If this is you, we can help. We will help you build these systems and accelerate your journey to financial success. If you need help, send an email to [email protected]
Grace Agada is the Senior Financial Happiness Director at Create Solid Wealth. She is an Author and Column Contributor in six National Newspapers. She is a contributor at BellaNaija, Nairametrics and Proshare. She is on a mission to help working-class professionals and CEOs become more financially successful. To learn more about Grace and how she can help you, send an email to [email protected]
Must-do things after you finally become debt-free
Now you are finally debt-free, these next steps will help you make sure you never fall back into debt again.
So now that you are debt-free what next? Remember that clearing your debt is just one part of the exercise; staying out of debt is vital to ensure that you don’t end up in the same financial injury. Living debt-free is not rocket science. All it requires is the consciousness that healthy finance is essential for you to live a happy life.
You may want to check out our previous articles 9 Brilliant ideas to pay off debt fast in 2021 and How to get out of debt: A step-by-step guide where we discussed extensively how to find your way out of debt.
Outlined below are some things to help you live debt-free; have a good read.
Make a list of your income and expenses
The first thing to do to ensure that you don’t fall into debt is to plan. Planning is such a vital step to success for anything we want to do in life. Indeed, if you don’t want to fail, you cannot neglect to plan. This doesn’t have to be complicated in any way. It’s as simple as you putting down words and figures. The first step in this process is making a list. You need to see on paper, what your finance looks like. It may not seem like such an important thing to do, but it is necessary. Making this list, all you have to do is write out what you earn on one side. If you have different streams of income, put it all on paper. Then, write out your expenses on paper, everything you know you spend money on monthly. Depending on when you receive your incomes; you can make it weekly or bi-weekly. Just compare how much is coming in against how much is going out.
Create a budget plan
The next step in the planning process is to create a budget. Based on your analysis from the step above, you should assign every dollar/naira you earn a task. You cannot afford to be passive with your money, give them work to do. They are available to make life easier for you right, but if you don’t tell them what to do, they cannot help you achieve that. You have to understand also; depending on what the ratio of your income to expenses is, you might need to make certain adjustments. In fact, if you want to stay out of debt, you NEED to make those adjustments. This step is not as difficult as you may think, if you do not know how to go about this process of creating a budget, you can use a budgeting app to make it easier for you. There are so many choices out there so you must choose wisely because your financial needs may be different from your neighbour’s.
Be intentional about your money
This tip can be summarised into the first two steps already outlined. But it is such an essential factor that deserves special attention. Intentional merely is being deliberate in your actions. Therefore, being intentional about your money requires that you don’t leave anything to chance. Conscious money habits will ensure better financial health and keep you from running into debt. So, as basic as the first two steps might seem to you, you really cannot neglect them.
Do not make purchases based on emotions
It is very easy to spend to make ourselves feel better. The painful truth is that the things you buy won’t make you feel better. They cannot take away that feeling, because when the initial gratification has waned, you would still be left with that emptiness you were feeling in the first place.
Unsubscribe from sales emails
Everybody likes to get the first updates for those juicy deals and grab them as they come. If you have not planned for it, please don’t do it. You have to unsubscribe from emails that make you spend more money. Remember that the person sending those emails wants to make money. You do not need to place that instant ordering; turn it off.
Maintain a good credit score
Remember when we talked about how to stay out of debt; one of the tips offered was to negotiate lower interest rates. Having a good credit score qualifies you for lower interest rates. More than that; having a good credit score grants you more negotiating power, better insurance deposits, easier approval for loan requests, it also affords you higher credit limits. Overall, having a good credit score places you on better standing than having a bad one.
Do not tie up your money in illiquid investments
As necessary as an investment is, you must engage in those with high liquidity as opposed to illiquid investments.
Earn more money
There is no human on this planet that this idea will not be appealing to. We always want to have more money, no matter how much we already have; it’s in our nature. The simple ways to earn more money is to get a side hustle, become a freelancer or contractor; use your skills to make money. With unlimited access to technology, the world of work offers more opportunity than ever for anyone to turn their skills into pay.
Staying out of debt can be summed into these few words; “Live within your means”. The way to ensure that you do that is by planning. Be intentional about your money. Life can happen at any time but even when it does, with a proper plan already in place, you will be better equipped to handle unforeseen circumstances than when you don’t even know where your money is coming from.
How to get out of debt: A step-by-step guide
Follow these few simple practices and you may well be on your way to living a debt-free life.
Having to run or hide from someone just because you owe them some money is not a very fun exercise. But what if you didn’t have to do it, what if you lived debt free? Hold your gasps; it’s not so shocking. It is very attainable, and if you can follow the few simple practices we’re about to examine, you can be well on your way to FREEDOM.
Here, we’ve outlined necessary steps to help you live debt-free;
Gather your data: These include records and information that contain your bills and expenses, income and source(s) of income, credit score etc. the goal here is to get you acquainted with yourself. You have to know yourself well enough to understand your spending pattern and identify critical areas to adjust or habits to do away with.
Understand your debt: Make a list of all your debts, all that you currently owe, and how much interest rates are charged on them. Remember to include the minimum required payment for each debt. This would help you understand the type of debt(s) you owe. Understanding your debt will help you know how it happened and give you a clearer perspective on how to clear it. If you have more than one type of debt, it can be challenging to keep track, and you may find yourself always paying money and not even knowing if you are a step closer to clearing your debts. But you cannot begin to pay off your debt until you understand what the figures in your records represent.
Create a budget and debt pay-off plan: Creating a budget should have come as a first step. However, that would be more effective in the situation that debt doesn’t exist, because one of the reasons for budgeting is to make sure that you DON’T fall into debt. Having gathered your data and coming to terms with what the records are; the next thing to do is to create a plan. There are different tools you can utilize to help you. A simple keyword search would give you an idea of what to do. The budget plan doesn’t have to be complicated, create a list that you would be able to understand and stick to the program.
Lower your interest rates: The reason why people fall into debt and find it challenging to pay is due to the interest rate charged on their actual amount borrowed. You see; because you are required to pay interest rates on that money, it drags out the length of time you could payback. Negotiate your interest rates lower. Even when you may have already borrowed and started paying it off, if you find it challenging to complete payment, you should consider asking for lower interest rates. Depending on who your lender is, and how persuasive you are, you may find yourself having less to worry about.
Pay more than you have to pay: Another reason you could remain indebted to someone is when you stick to just paying the monthly required amount. Because of the interest charged on most loans, you only concentrate on paying that specific amount for that particular month. That keeps you in debt because instead of bringing you closer to clearing your debt, you are only dragging it out. Regardless of the interest rate, if you can pay more than the expected amount, you should go on to do so. It is something that you can discuss with your lender. It serves both of you because the faster you clear your debt, the quicker he gets his money back.
Earn More Money: To settle your debt, you have to go out of your way to ensure that your income supersedes your expenses. One way you could earn more money is by starting a ‘side hustle’ or taking a part-time job. In this modern age, there are more opportunities than ever, for anyone to diversify their streams of income. And most of these gigs are conveniently remote; you can run them from the comfort of your home. Of course, any human would be elated at the prospect of earning money, and when you are in debt, you just have to go out of your way to do everything possible to clear.
Curb Your Excesses: If you are in debt and you are finding it difficult to clear, evaluating your lifestyle habits could help put things into perspective. You have to be honest with yourself. If you want to pay off your debt faster, you’ll need to cut your expenses as much as possible. One tool you can create and use is a bare-bones budget. This is a strategy you can use to make your expenses as low as it can go and live a minimalist lifestyle. Live only on bare necessities and do away with frugality.
No matter the type of debt, you can always clear it. Never believe that it is impossible. Always remember to have a plan. You really cannot afford to leave your life to chance. Be intentional about every aspect of your life, especially with your finances.