Liquidity vs. Yield: How to keep the balance

Liquidity vs. Yield: How to keep the balance

Liquidity vs. Yield: How to keep the balance

As an investor you are often faced with the decision between liquidity and returns. On the one hand, you want your money to be available at short notice, but on the other hand, you strive for the highest possible returns. In this article you will learn how you can find the balance between liquidity and returns and what aspects you need to consider.

Liquidity: what does it mean?

Liquidity refers to the ability of an asset to be converted into cash quickly and at a fair price. In the context of investments, high liquidity means that you can get your invested money back at any time without major losses. Liquidity is particularly important when unforeseen expenses arise or when you need to access your money at short notice.

Forms of liquidity

There are different forms of liquidity. The most cash-like form is cash, followed by bank deposits, which are usually readily available. Highly liquid securities such as stocks with high trading volumes are also among the most liquid forms of investment. Real estate, on the other hand, is considered to be rather illiquid because it often takes a long time before it can be sold.

Return: What is it and why is it important?

The return on an investment is the return you receive from your invested capital. It is an important measure of the success of your investment strategy. A high rate of return means your assets will increase in value and you will have more money in the future.

Risk-return ratio

When it comes to returns, it is important to consider the risk associated with an investment. A higher return potential often comes with a higher risk. It is therefore crucial to find a balanced mix of return and risk that suits your personal risk tolerance and investment goals.

Find the right balance

The question of how to find the right balance between liquidity and returns is crucial to a successful investment strategy. Here are some aspects to consider:

Investment horizon

The investment horizon, i.e. the period for which you want to invest your money, plays a crucial role. Short-term investments typically require more liquidity because you need to access your money in the short term. With long-term investments, however, you can rely more on returns because you are not directly dependent on your capital.

Diversification

Diversifying your portfolio can help you maintain a balance between liquidity and returns. By investing in different asset classes and instruments, you can reduce risk while increasing the potential for returns.

Risk tolerance

Every investor has an individual risk tolerance, i.e. the willingness to accept fluctuations in the portfolio and potential losses. Depending on your risk tolerance, you can focus on liquid investments or take a little more risk to achieve a higher return.

Frequently asked questions

Why is liquidity important for investors?

Liquidity is important to be able to quickly access cash in unexpected situations. It also provides flexibility for planned expenses and emergencies.

What role does inflation play in deciding between liquidity and returns?

Inflation can reduce the purchasing power of your money over time. Therefore, it is important to achieve a return that is higher than the inflation rate in order to build wealth in the long term.

Should I always only focus on liquidity or returns?

No, a balanced mix is ​​usually best. Depending on your individual situation and investment goals, you should find the right balance between liquidity and returns.

Conclusion

The decision between liquidity and returns is not an easy one, but an important one for every investor. It's important to find the right balance that fits your personal risk tolerance and investment goals. By considering investment horizon, diversification and your risk tolerance, you can develop a successful investment strategy that will provide you with stable returns over the long term.