We all know that having the right types of investments in your portfolio is critical to achieving your goals. But did you know that you can’t create a successful mix of investments without first knowing what you need each asset to do for you? It’s like trying to pack for a vacation without knowing your destination. Get unlucky and you might be unpacking flip-flops when there’s a foot of snow outside. The same principle applies to your financial success—not knowing your desired destination (aka your financial goals) can hinder your investment selection and overall performance.

In addition to knowing your destination, an important ingredient when it comes to your investment mix is understanding the liquidity or illiquidity of a particular asset. Liquid investments are holdings that can readily be converted into cash with a certain level of price stability and include such assets as cash, money market funds, Treasury bills, and bonds. Illiquid investments are assets that are not easily sold or exchanged for cash, often referred to as “private placements”. If forced to sell before the end of any holding, or lock-up, period, these illiquid assets may suffer a substantial loss in value due to their limited marketability and/or greater price volatility.

So, assuming you know where you’re headed on your vacation (your financial goals) and you’re preparing to pack your bags for this trip (creating the appropriate mix of investments in your portfolio), my question for you is this: what do you carry on to the plane versus check down below?

When organizing your carry-on, you know the contents will be easily available and accessible to you throughout your journey. Usually this includes some snacks, a book or laptop, and, of course, your wallet (so you can buy more snacks if you run out). Even if you don’t do anything with these items during the flight, you’re able to relax knowing they’re within arm’s reach in case you do need them. That accessibility mimics that of your liquid investments. You want these funds to be quickly available to you to help manage any expenses that come up as you make your way towards reaching your financial goals. Liquid holdings serve a specific and important purpose in your portfolio and may need a place in your investment mix, just as your carry-on has a place on the plane (tucked under the seat in front of you).

Unlike your carry-on, the items you choose to put in your checked bag are not easily accessible to you during your journey. While we all get a little nervous watching our luggage disappear into the darkness of the conveyer belt, we also know that at our final destination the items in our bag will maximize our vacation experience. We didn’t have to limit ourselves to a three-ounce shampoo bottle or have to choose between two pairs of shoes. This checked bag will provide us with both the variety and volume that our carry-on can’t. This inaccessibility is typical of the illiquid investments in your portfolio. Locking up your money can also be nerve-wracking, but just like your checked bag provides benefits over your carry-on, illiquid assets can also be beneficial as part of your portfolio when appropriate: higher targeted returns to compensate you for that lack of accessibility, predictable cash flow compared to publicly traded assets, and lower relative volatility due to the lack of daily pricing.

As you can see, both liquid and illiquid investments can serve specific purposes in a portfolio. Some travelers may choose to only bring a carry-on. They understand the limitations of their decision but believe the convenience of access outweighs the benefits of delayed gratification. Other travelers may always choose to check their luggage, knowing they prefer to be greeted with a larger bag (with more to choose from) upon their arrival. But once you know what you need your assets to do for you, you’re better able to prepare so that you can both enjoy your journey towards achieving your financial goals and maximize your success once you do reach your final destination.

Disclosures:

This information is presented for educational purposes only and is not intended to constitute investment advice.  Morton Capital makes no representation that the strategies described are suitable or appropriate for any person. Investments in illiquid assets are available only to eligible clients and can only be made after review and completion of the applicable offering documents. Illiquid investments involve a high degree of risk, including the loss of capital. You should consult with your financial advisor to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.