|
|
However, not all financial assets are equally liquid. Some are more liquid than
others. You can immediately cash your fixed deposits but you may need a few days
to sell your stocks. Assets that are less liquid tend to have a wider spread between
the buying (bid) and selling (offer) price.
Almost everyone has seen a house or piece of commercial property sit on the market
for weeks, months, or even years. Even then, there is an air of uncertainty until
it is consummated. Investors have to carefully assess their own situation to determine
their liquidity. Selling a house could be more complex as the buyer or seller has
to agree on the price.
Hence, if you are investing your money to buy a new car or pay next semester's college
fees for your children, then liquidity is necessary and financial assets will be
preferred. If the funds can be tied up for long periods, physical assets can be considered.
Apart from liquidity, the risk-rewards factor should be also considered. All prospective
investments whether physical or financial assets should be evaluated in terms of
trade-offs between risk and return. Historical performance is generally used to study
the performance a particular investment but there is no guarantee that you will get
the same performance in the future.
One measure of risk is to study the range of possible outcomes. With bonds, you are
assured of getting the yield in terms of interest payments and also the principal
upon maturity. Stocks although more risky may triple your return over the long-term
as compared to property.
Despite its relatively low return and liquidity compared to financial assets, physical
assets should not be dismissed entirely. They offer a hedge against inflation because
inflation means higher replacement costs. Physical assets can also be a hedge against
the unknown and feared. Gold and other precious metals are still perceived as the
last safe haven for investments during uncertainties such as war.
Another advantage is the psychological pleasure they can offer. One can easily relate
to a beautiful painting in the living room, a gold coin which you can wear or display
as a pendant or an attractive property development. From time to time these assets
become "fashionable" and can create substantial opportunities for profits.
Physical or financial assets - in which one should you invest more? The answer is
both. Your portfolio should be a mixture of both types of assets. The key word here
is diversification. General findings indicate that movements between various types
of physical and financial assets are less positively correlated than those with financial
assets only.
Financial and physical assets move in opposite directions most of the time, thus
some efficient diversification may occur. Experts agree that enlarging the universe
of investment alternatives benefit the overall portfolio construction in terms of
risk-return alternatives.
The allocation of assets will very much depend on your investment profile as well
as the economic outlook Your investment portfolio should be treated with caution
especially during turbulent periods.
|
