The Money Meets Medicine Podcast

The Importance of Liquidity with Investing

Editor’s Note: It is that time of year. If you are looking for a student loan consult that is affordable, even for residents, we’ve got you covered with the Money Meets Medicine Student Loan Consult process. Or maybe you are looking to obtain own-occupation disability insurance from a source you can trust? The MMM Disability Insurance team is here to help. Either way, make sure you take care of both tasks! These are two of the most important financial tasks for docs. Now back to the topic at hand…

Today, we’re stepping into the world of liquidity. Liquidity, while flowing off the tongue like water, holds a significant influence that can shift the balance in your savings and invesmtents. Yes, liquidity. Not just a fancy financial buzzword, but one of the important facets of smart investment strategies.

Liquidity is like having an escape hatch in your portfolio, ready to spring open at a moment’s notice. But here’s where it gets spicy: not all assets swing doors wide with equal gusto. Some are more like jumping out of an airplane. Once you jump, there is no going back. It takes time to hit the ground and, only then, can you tap back into an illiquid investment.

In markets thrashing with volatility and whispers of recession echoing through corporate corridors, understanding which part of your nest egg can turn into cash without playing tug-of-war is paramount. Yet here lies the paradox—while some investors sleep soundly atop their liquid fortresses, others are drawn irresistibly towards illiquid treasures buried deep within private markets, including private equity and real estate. The lure of investments that aren’t so easy to cash out can sound like a perilous song, yet for the daring souls ready to steer through these choppy seas, is immense wealth on the other side?

Let’s dive deeper into this dynamic landscape and explore how savvy investors manage liquidity risk while hunting for hidden gems.

Table Of Contents:

 

What is Liquidity?

Liquidity might sound like something you’d discuss over a fancy dinner, but its really all about how quickly you can turn your assets into cash because let’s face it, nobody likes being stuck.

So what is liquidity? In simple terms, it’s your get-out-of-jail-free card in finance. The quicker you can convert an asset to cash without losing value, the more liquid that asset is considered. Think of it as financial flexibility – having the means to jump on opportunities or dodge bullets when needed.

The Spectrum of Asset Liquidity

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Liquidity isn’t one-size-fits-all; it runs on a spectrum. On one end, we’ve got stocks and ETFs, shining examples of liquid assets. Why? Because they can be sold almost instantly during market hours at market prices.

  • Stocks: They’re pretty much synonymous with liquidity in most folks’ minds. Big-name companies especially are easy to buy or sell fast.
  • ETFs: Like mutual/index funds (they basket together various stocks) but can be sold at all hours like a stock – making them highly liquid too.

Moving along that spectrum towards the lowest liquidity land, we find private equity and real estate taking their spots. These guys aren’t so quick to flip for cash without potentially taking a hit on price or waiting ages for the right buyer. But hey. High risk could mean high reward…or not. Embarking on the adventure of investment is akin to being on an exhilarating rollercoaster, full of ups and downs.

In short: Liquidity refers to how swiftly you can make your exit—or entrance—without affecting an asset’s price significantly.

The Perils of Illiquid Investments

Exploring the dangers of investing and saving within illiquid investments, let’s talk about why having your cash tied up isn’t always a win. Sure, those rare art pieces or that land in an up-and-coming area seem like great ideas. But when life throws you a curveball? That’s when things get tricky.

Imagine needing quick cash for an emergency. If most of your wealth is locked away in assets that take ages to sell, where does that leave you? Scrambling, that’s where. This lack of financial flexibility means missed opportunities or worse – selling off assets at a loss just to get liquid fast.

The FOMO Factor in Illiquid Investments

Why would people make this mistake? The most common culprit is FOMO – the fear of missing out. It drives us towards deals we think are too good to pass up.

  • We see dollar signs,
  • Risk warning bells fade into the background.

But here’s the kicker: These less liquid investments carry more risk than meets the eye. Illiquidity means not being able to access funds without potentially huge sacrifices. It also means missing out on other investing opportunities should they arise.

We have to be honest here, too. lliquid assets can pose significant risks if they make up a large part of your net worth. Suddenly those exciting opportunities start looking like handcuffs on our finances. Make wise choices; don’t let FOMO cloud judgment.

Liquid Investments Every Doctor Should Consider

Why does this matter for physicians? Because we are often targeted with illiquid investment “opportunities” both by medical professionals and also other physicians in the finance space. In our relentless quest to amplify our earnings, we medical professionals are perpetually in search of astute investment avenues.

Yet, the truth is that you don’t have to hit home runs with investing. Hitting a single every day will get you to your goals in a much more predictable fashion. And you won’t have to worry nearly as much about striking out (or managing your own property).

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In fact, a low-cost diversified index fund strategy (not sexy, but it works!) is what allowed us to achieve Coast FIRE before the age of 40. What is Coast FIRE? Well, it is the point where you have accumulated enough wealth that you don’t need to save another dollar. What we already have saved through a simple index fund strategy would continue to grow and allow us to retire at the age of 65 without investing another dime. This allows me to work two days per week in anesthesia 42 weeks of the year without having to worry about a thing.

Stock Market Investments

Diving into stocks and ETFs might seem like a rollercoaster ride reserved for Wall Street wolves. But here’s the thing: utilizing a low-cost diversified index fund strategy will not only let your wealth grow, but it will do so in a way that allows you to have liquid access to funds and be able to sleep at night. Think of it as having your cake and eating it too – you get access to potentially higher returns while being able to cash out when needed.

  • Growth: Stocks have historically provided significant growth opportunities over time.
  • Liquidity: You can buy or sell shares quickly due to high trading volumes in stock markets.

A quick glance at market trends will tell you why stocks and ETFs are considered highly liquid. They allow you fast trade execution at prices close to market rates, which is crucial during volatile periods or when unexpected expenses pop up.

Money Market Funds

Stocks and index funds are not the only liquid investment out there. In fact, there’s something more laid-back yet equally rewarding – Money Market Funds. Picture this as your financial safety net; low risk but still getting some action from interest earnings better than what your savings account offers.

  • Safety Net: Provides stability in an unpredictable financial world by investing in short-term securities like treasury bills and commercial paper.
  • Ease of Access: Similar to checking accounts but with better yields; withdrawal limits apply but generally flexible enough for most needs.

In essence, these funds act like cushioned benches in the park of investment options—comfortable enough for resting but ready whenever you need to jump back into action. With minimal risk involved, money market funds serve as viable liquidity pools, letting docs keep their finances fluid without sacrificing all gains.

The key takeaway? Liquid investments such as stock market options and money market funds present avenues worth exploring for any doctor aiming towards both wealth accumulation and easy accessibility of their resources—a balanced approach catering well even amidst busy schedules filled with saving lives (and now growing wealth).

Key Takeaway: 

 

For doctors aiming to grow wealth without sacrificing accessibility, exploring liquid investments like stocks and money market funds offers a balanced approach. These options provide growth potential and stability, perfect for busy schedules.

Doctors often get pitched on investment opportunities that sound too good to pass up. But here’s the thing, not all that glitters is gold, especially when it comes to illiquid investments.

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Real estate is the most common example. The siren call for many high-income earners looking to expand their portfolio. The allure? It seems like a tangible asset you can touch and feel—a safety net in turbulent times. Doctors also often hear from other docs who have gotten to financial independence quickly through real estate. Plus, who doesn’t love the idea of passive income from rental properties or flipping houses for a profit?

But let’s pump the brakes for a second. Embarking on the journey of property investment is fraught with its unique hurdles. Think about market volatility, maintenance costs, unexpected vacancies…the list goes on. And most importantly, real estate is not something you can quickly turn into cash without potentially taking a hit financially.

Real estate is not the only trap I see many docs fall get pitched. Moving over to private equity—it sounds sophisticated and exclusive right? Investing in startups or mature companies outside the stock exchanges promises higher returns than what public markets might offer.

However (and this is a big however), these investments lock your money away for years with no guarantee of success. They’re also notoriously opaque when it comes to understanding where your money’s going and how it’s being used—raising both eyebrows and risks alike.

In summary: yes—illiquid assets have their place within an advanced portfolio strategy but tread carefully; make sure they align with your overall financial goals before diving headfirst into those tempting pitches doctors so often hear.

Liquidity vs. Investment Goals Alignment

It’s a tightrope walk, really. On one side, you’ve got your long-term investment goals—those big dreams that need time to blossom. On the other? Your liquidity needs—the ability to access funds when life throws a curveball.

Balancing Liquidity with Long-Term Goals

So how do we marry these two seemingly opposing forces without compromising our growth objectives? Let’s break it down.

  • Diversify wisely: Not all assets are created equal in the liquidity spectrum. Spread your investments across stocks, bonds, and cash equivalents to ensure some of your portfolio can be quickly converted into cash if needed.
  • Earmark emergency funds: Keep a safety net of easily accessible money for emergencies. By diversifying your assets, you’re safeguarded against the need to prematurely withdraw from investments meant for the long haul.
  • Kick-start with liquid assets: Starting out or looking to rebalance? Consider leaning towards more liquid options like index funds or ETFs that offer both growth potential and easier access compared to their illiquid counterparts.

The stats don’t lie: Lack of liquidity can handcuff you during financial surprises or opportunities. Being caught unprepared could mean missing out on market dips ripe for buying or being unable to cover unexpected expenses without penalty.

In essence, striking this balance isn’t just about smart investing—it’s about crafting a strategy flexible enough to adapt alongside life’s unpredictable nature while still keeping an eye on the prize: those long-haul goals that get us up in the morning.

You’ve heard it before but let me hammer it home: A well-thought-out plan considers both immediate needs and future aspirations because what good is reaching your financial peak if you’re too strapped along the way?

 

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