Liquidity means that you have access to your cash quickly, or you can readily sell assets so that you can get your money when you want it.
"We expect heightened volatility on more aggressive sectors of the market for the foreseeable future," said Rob Williams, managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research. "So, yes, it may make sense for some investors to have some money in more liquid investments."
In addition, Williams said you could plan for investing opportunities in addition to emergencies you encounter.
He said the yields on cash and cash investments are now higher than they have been for some time – an attractive benefit and opportunity.
"But remember, don’t wait too long to reposition into other higher-yielding investments or stocks if you’re truly invested long-term," Williams added. "Anticipating bounces in markets is notoriously difficult. So, staying invested in a diversified portfolio with greater potential for growth to beat inflation over time is the best long-term course to wealth, we believe, for most investors over time."
What about your retirement plan assets?
Although you can liquidate these assets, there are extenuating factors to consider.
"We don’t think of 401(k)s, IRAs or other retirement savings as being truly liquid, for planning purposes, even if the money is invested in a money market fund or cash or other investments," Williams said. "There would be a cost, in fees potentially and foregone savings anticipated for retirement, beyond just the ability to sell."
What about stocks?
Stocks held in a brokerage account are also liquid, said Williams, in the sense that they can be sold.
"But, could you sell them, every day, at a relatively stable price?" Williams said.
This is less certain, he said, given stocks' risk and more dramatic dips in price from time to time relative to cash.
"If you need the money soon, at a relatively stable price, cash and cash investments play a valuable role," he added.
What about your home?
Should you consider your home a liquid asset? Sure, you can certainly sell it, if you choose. However, there are outside factors. How long would it take to sell and at what price? Williams recommended asking yourself, "If I had to sell my house today, and only today, how much would it be worth?"
"A house, at least to sell in full, is not truly liquid, for the purpose of planning or investment," Williams said.
What about a home equity line of credit?
John Pilkington, a senior financial adviser at Vanguard Personal Advisor Services, said in the event someone needs access to liquid funds (to pay for unforeseen, significant expenses), the primary focus should be tapping an emergency savings account.
"With that in mind, a home equity line of credit can also provide a liquid safety net, and be considered a secondary layer of protection," he said.
Also, for individuals or couples who have home equity available, a HELOC is a financial strategy that can provide liquid funds, he noted. However, given the variable interest rates, it should be seen as an alternative strategy.
Should you maintain long-term discipline for short-term concerns?
Pilkington said Vanguard’s Principles for Investing Success focuses on creating clear, appropriate investment goals; developing a suitable asset allocation using broadly diversified funds; minimizing cost; and, importantly, maintaining long-term discipline, even amid global market uncertainty.
"With that said, given the current market environment, I would recommend that if someone has a near-term expense, such as saving for a house, they consider keeping or directing funds to cash equivalents like savings accounts or money markets," he advised. "With the near-term volatility of markets and rising interest rates, money market funds are likely to start providing more interest, along with stability of principal value."