Liquid Assets vs Fixed Assets: How They Fit Into Your Portfolio

If you were hit with a $5,000 hospital bill today, would you be able to pay it without going into debt?

If you've got that much sitting in a checking or savings account, it would be easy to cover those costs on the spot. If your money is tied up in stocks, it's a little harder, but you could probably sell them off and get the money you need within a few days or weeks. If your money is tied up in your house, it will probably be difficult to impossible to get the cash you need in time.

The more liquid your assets, the easier it is to access cash when you need it. However, you could be sacrificing returns and your ability to build wealth by keeping too much liquidity in your portfolio. Here's what you need to know about liquid assets vs fixed assets and how to incorporate both into your investment strategy.

Liquidity is a measure of how efficiently an asset can be converted into cash. This efficiency takes into account convenience and speed as well as value. In other words, an asset with a high degree of liquidity is one that can be sold for cash easily and quickly without incurring a significant financial loss.

There are assets that can be converted into cash at any time, but doing so might result in a significant loss of value—for example, a certificate of deposit (CD) can be converted to cash at any time, but doing so before its maturity date will usually result in a penalty fee. Assets like CDs, while not necessarily fixed assets, are considered less liquid than many other assets for this reason.

Examples of liquid assets

Cash is as liquid as it gets. In addition to physical currency, this also includes checking accounts, savings accounts, money orders, and money market accounts. After that, cash equivalents and marketable securities are considered the most liquid assets.

Examples of liquid assets, roughly arranged by degree of liquidity, include:

• Cash and checking accounts
• Savings accounts and money market accounts
• Money market funds
• Treasury bills and treasury bonds with less than one year to maturity (or those than can be immediately sold on a secondary market)
• Certificates of deposit (CDs) with less than one year to maturity
• Mutual funds
• ETFs
• Individual stocks
• Bonds
• Tax-advantaged retirement accounts such as a 401(k) or IRA 

The exact degree of liquidity of many of these assets depends on a number of factors. For example, tax-advantaged retirement accounts are completely liquid once you've reached retirement age, but less liquid before that due to early withdrawal penalties. When it comes to bonds and CDs, degree of liquidity is dependent on their maturity date and any early withdrawal penalties. 

With stock market products, degree of liquidity usually revolves around demand. For example, an ETF that is widely-traded is more liquid than a niche ETF that isn't as widely traded. Low-volume stocks will be less liquid than popular stocks as it will be harder to find a buyer, especially if you're looking to sell a large amount. And when the market is down, stocks in general become less liquid because it's harder to sell them without losing significant value.

Fixed assets are assets that are intended to be held for the long-term and can't be easily converted into cash, at least not without giving up a substantial amount of value. They're often referred to as tangible assets or physical property, but some intangible assets are also highly illiquid. 

These assets may be hard to sell for a number of different reasons. It may be difficult or time-consuming to find a buyer, the process of selling may involve a lot of bureaucracy, there may be an ability to sell but not without incurring penalty fees, or the asset might involve a contract requiring you to hold for a set period of time.

Illiquid assets are used to build wealth over a long period of time, typically five years or more. This can be for the purpose of saving for a long-term goal like covering a family member's college education, investing for retirement, or creating a legacy.

Examples of fixed and highly illiquid assets

In a business context, the term fixed assets often refers to tangible assets that fall into the categories of property, plant, or equipment. From a personal investing standpoint, though, a fixed asset is any asset that's highly illiquid, physical or not.

Examples of commonly owned fixed assets include:

• Real estate
• Cars
• Land
• Machinery and equipment
• Fine art
• Collectibles
• Private market investments (venture capital, private equity)

A common rule of thumb is to keep at least 5% of your portfolio in cash. You might want to keep even more of your assets in cash, or highly liquid assets, depending your lifestyle and financial goals.

Your individual liquidity needs will depend largely on two factors:

1. Your income and job stability
2. The time horizon for your savings and investment goals

The first factor determines how much of your net worth should be kept in cash for emergencies. A typical emergency fund strategy is to keep at least three to six months' worth of living expenses in a high-interest savings account. However, if your job or income are unstable, or if your lifestyle involves facing lots of unexpected expenses, you might want to incorporate a higher degree of liquidity into your portfolio.

Beyond deciding how much cash you need to keep for unexpected emergencies, you'll need to identify what your goals are for your investments and the time horizon for each of those goals. From there, you can manage your liquidity accordingly. For example, if you're investing a down payment for a house that you plan to purchase in three years, you'll want to keep that money in a fairly liquid asset. If you're investing for retirement and don't plan to retire for 20 years, you don't have to worry so much about liquidity.

The holy trinity of investing concepts is liquidity, risk, and return. The ideal asset would be one that's highly liquid, low risk, and offers high returns—but these assets are virtually non-existent. Typically, if an asset is highly liquid, it either offers low returns (a savings account, for example) or involves a higher degree of risk (stocks, for example). 

Creating a healthy portfolio isn't just about making sure you have a good balance of liquid vs fixed assets. Even more important is figuring out how to balance all three of these factors. If your entire net worth is in a savings account, you have a high degree of liquidity, but low returns mean you're likely losing money to inflation. On the flip side, if you're retired and your entire net worth is in stocks, you're likely taking on too much risk given that you have an immediate need for those funds.

It usually isn't possible to invest in fixed assets without giving up liquidity, but there are exceptions. It's becoming increasingly possible to invest in alternative assets like real estate, fine art, and collectibles that can help you protect your wealth against a market crash while still maintaining a relatively high degree of liquidity in your portfolio.

When it comes to fine art and collectibles, fractional investing platforms like Masterworks and Public make it easier to cash out. These platforms acquire tangible assets like valuable paintings, rare sneakers, or expensive sports cards and break them up into shares you can purchase, similarly to how you'd buy shares of a company on the stock market.

While the ideal holding period for these assets is still several years (as you want to give them time to appreciate in value), these apps have secondary markets that allow you to trade your shares at any time, assuming you can find a buyer at your desired price per share.