Just how liquid are your investments? If you don’t know the answer to that question, it’s time to find out.
Many people evaluate their investment options by how much return or growth they can reasonably expect and don’t look at other important factors. In addition to asking how safe your investments are, you should also be asking how liquid they will be.
The definition of a liquid investment is “an asset that can be converted into cash quickly and with minimal impact to the price received”. For an asset to be considered liquid, it needs to be bought and sold in an established market with enough participants to absorb the sale without significantly impacting the price.
So why is the liquidity of your investments so important? For one, if it cannot be easily sold or if your money is “locked in” somehow, you may not be able to access it when you need it. If there is not enough volume to absorb your intended sale without impacting the price, you may be forced to either hold onto something you no longer want or alternatively sell the asset for less than it’s supposed to be worth. Either, or both of these issues, can have a significant impact on your investment portfolio’s value and your income needs.
To help illustrate how the lack of liquidity can be an issue I’m going to highlight a couple of examples:
A client had RRSP holdings in a Mortgage Investment Corporation (MIC). When the client turned 71 he had to convert his RRSP to a RRIF. Every year he receives a T4RRIF for the RRIF minimum, which he must withdraw. However, he does not actually receive the money, but instead the organization does an in-kind transfer to a non-registered account in his name.
He has repeatedly tried to cash in the investment but there is no money available to pay investors. He is left holding an investment that he can’t access, never receives an income from and has to pay taxes on.
Another example is an ill-fated development project is in the South Pandosy area of Kelowna. Several individuals “invested” $200,000 of their hard-earned money in 2011 to buy a “bond” to help finance this joint residential and commercial development. After the original developer ran out of money, a second developer took over.
While they had expected to be paid back roughly $250,000 in March of 2013, the second developer also failed to finish the project and it ended up in front of the courts. 20 months after they had expected to be repaid, the courts finally accepted a lowball offer from a third developer to take the project on.
Where did this leave the investors who’d each put in $200,000? You guessed it; they were too far down the list of those owed money and ended up with $0.
If an investment looks too good to be true it probably is. Think of a MIC invested in mortgages that pays the investor 10 per cent per year and claims to be in “safe mortgages just like yours”. What do you pay in interest on your mortgage, maybe three per cent? The math just doesn’t add up…
So, what should you learn from all this? In addition to researching what type of returns you might earn and how risky an investment is, make sure to also ask how liquid it will be. Your hard-earned money needs to be safe, secure and accessible when you need it – and there is no reason why you should accept anything less!
This column is brought to you by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments. Please contact your own advisor for specific advice about your situation.