Ok for starters, not all investments are illiquid. And for a second start illiquid means that your money is not easily accessible. Sometimes people think of investments as some money chomping demon that stunts their cash flow and standard of living. But I want you to love investments almost as much as I do so let’s get to know them better.
Most investments are liquid like stocks, mutual funds, and bonds. Of course, this is assuming you have someone on the other end who wants to buy your investment. Think about Enron when it was going in the crapper, there were way more sellers than buyers.
Stocks are sold during trading hours and are sold immediately. As an investor, you receive your money after T+3 days (T being the trade date, weekends and holidays don’t count.) Most times your money can be directly deposited into your checking or savings account.
Mutual Funds are priced and sold at the end of the trading day and have a T+3 days settlement also. Now there are certain mutual funds that only allow an investor to sell shares a couple days a month. Make sure before you buy said mutual fund you know if these restrictions apply.
Bonds work like stocks in the sense that they can sell immediately. After a T+3 days settlement, money can be moved to your bank accounts or mailed to you in the form of a check. For you Millennials, checks were these things we carried around that was the size of a brick prior to debit cards. Ahh, the fondness of writing a check at Burger King for a Whopper, or better still writing the check out 2 days before payday and hoping the deposit made it before the check cleared. A Whopper back in the day could cost you $25.00 by the time bank fees were added in for bouncing your check. But I digress.
Now for illiquid investments and listen closely my friends because this is important. For the most part, there are a couple illiquid investments you need to keep an eye out for. Annuities being one of the biggest.
I am not an annuity hater like Suze Orman, no, I think they are great products for the right person and when they fit man do they fit. Yet, all annuities have a required holding period. Some could be as little as 3-years some all the way to 20-years. If you decide after the opening of the annuity and whatever the maturity you want to withdrawal your money, you will be hit with a penalty for withdrawal. Also depending on the annuity, you could have negative tax ramifications as well. Again, do not freak out if your advisor mentions an annuity to you. If it fits with your objectives dig in, however, they are also one of the biggest commission payers in our industry. Based on my experience I have seen instances where an annuity was not the best fit but may have been recommended because of the commission payout. Again, don’t hate annuities, get a trusted advisor and hate the player, not the game.
REITS AKA Real Estate Investment Trusts, are also considered illiquid. Think of them as a mutual fund of real estate. There are certain tax implications that affect them that I won’t get into here but know that they are not an investment you put your emergency money.
Life Insurance-Now some life insurance builds cash value. Like annuities when life insurance fits man there is nothing better. But, life insurance products have a 10-year holding period before you can access your cash value. Please note that Term Life Insurance does not build cash value. Depending on the policy within the first 10 years if any of the cash value is withdrawn you could have loan fees as well as affect the face value of the policy. In my humble opinion, life insurance is one of the most missed financial planning opportunities. In the act of full disclosure, it is also another big payer in our industry. As stated above, there are many instances where life insurance is not the right fit. Thus, I will scream it from the mountaintop again, MAKE SURE YOU TRUST YOUR ADVISOR, and may I recommend you work with a CFP®. Did I mention I was a CFP®? Jus’ sayin.
In other blog posts, I will be discussing basic financial terminology, but that day is not today. If you have a question or want to tell me how great I am, email me at mel@hotmoonfinancial.com or hit me up on twitter @melrocksmoney.
