Monday, August 27, 2012

Important liquid net worth in your portfolio

A traditional man invest the money to crop and land. They do not recognize saving account moreover the stock or mutual fund. When he need to finance the kid, he has no money. He has no choice to sell his farm crop. Unfortunately, there was no one to buy the crop. Finally he borrow the money to the usurer. The amount is below the farm crop. The usurer charge high interest to the farmer. The farmer cannot pay the interest; as consequently, the usurer seize the farm. The farmer asset.
From Illustration above, we can learn that the liquid set is very important. The lack of liquid net worth make the farmer loss his crop farm. He has made mistakes by invest the money at the land only. If he had few gold bar, He would not have to borrow the money from userer. He can sell the gold bar to the jewel shop or pawn shop.
The college will not receive the farmer land as the college fee. They just want cash . 
The liquid net worth is a way to maintenance your emergency fund. The farmer has no emergency fund so he must borrow the money to the usurer. The farmer supposedly earmark the emergency fund before the kid enter the college. I cannot blame the farmer because he do not know about finance.  The emergency fund is contain liquid asset only such as cash, saving account, non IRA mutual fund, marketable securities and precious metal.
The liquid net worth also ensure the balance of portfolio. Our asset must be diversified either liquid or illiquid asset. The lack of liquid asset can influence the illiquid asset. Like the farmer, he must sell the crop whereas the crop is the only asset. On the other hand, having the liquid asset only is not good too. You cannot collect the return from illiquid assets.

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