Liquid Assets vs. Private Assets

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Written By
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Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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Liquid assets are those assets that can be easily converted into cash and are used to pay off short-term debts.

Examples include cash, accounts receivable, marketable securities (e.g., bonds, stocks), etc.

Conversely, private assets represent ownership of physical property or rights that cannot be readily converted into money without a certain process. These include equipment and machinery, land, buildings, and other tangible items.

The main difference between the two is their liquidity – liquid assets are more easily converted into cash than private assets.

Value of Liquid Assets vs. Private Assets

The value of liquid assets is generally determined by market forces as they marked to market frequently.

On the other hand, it can be more complex to estimate the value of private assets, as it depends on estimates, such as comps, discounted cash flow, valuation multiples, and more.

Additionally, liquid assets are seemingly subject to more volatility than private assets, given their liquid nature (a topic we’ll discuss more in the next section).

When it comes to trading, investing, and portfolio diversification, liquid assets may be preferred as they can provide flexibility and ease of access in times of need.

Private assets are more suitable for longer-term investments. Traders will generally work in liquid markets, as their timeframes are shorter-term.

If you need to change your mind about something you can get out of a liquid asset much easier than a non-liquid one, often with just a few clicks.

It is important to consider the tradeoffs between liquidity and value when making investment decisions. While liquid assets can provide quick access to funds, private assets may have the potential for higher yields and greater returns over time.

It’s often talked about that there’s an “illiquidity premium” built into asset markets. In other words, you will often get some yield benefit from illiquid assets because they’re not easy to sell. This means they’re in less demand, which lowers their prices and increases their yields, all else equal.

Moreover, many people comb over liquid markets like stocks, so it’s generally more difficult to find a good deal. In markets with less competition, it is generally easier.

Private asset markets also involve using a certain skill set and active management to drive value. With liquid markets, many assets can be purchased and held passively.

Overall, investors should consider their personal preferences and situations when deciding between liquid assets and private assets for their portfolio. This will help them strike a balance between liquidity and return on investment.

 

Are Private Assets Safer than Liquid Assets?

No, because something is not liquid and you don’t see its price constantly marked to market does not mean it is less volatile, less risky, or exempt from the same underlying economic forces as assets that are traded on a public exchange.

The risk/volatility of private assets is not lower; rather, it’s just harder to see.

The claim that private assets are safer is called “volatility laundering” (i.e., the specious argument that private assets inherently better hold their value than their public market counterparts).

For example, almost all homeowners value their homes by looking at recent sales in their area.

Unlike assets constantly marked to market, the most recent home sales in an area may have happened weeks or months ago, not seconds ago like transactions in public markets. So homeowners are regularly using outdated prices.

Gauges like Case-Shiller are also based on outdated data and are formed as a moving average, so they lag even more.

For privates, in bad markets, the price buyers are willing to pay and what sellers are willing to sell at widens, so sales activity falls significantly.

This does not mean the old prices continue to be accurate. If it was a liquid market they would simply fall because bid and ask prices have to match in markets that are liquid.

Accordingly, the smoothed out nature of private asset pricing (private real estate, private equity, venture capital, etc.) is misleading.

It’s just that it takes longer to discover what those new prices are given the lack of liquidity and transparency in private markets.

 

List of Liquid Assets

Liquid Assets:

  • Cash
  • Money Market Funds
  • Certificates of Deposit (CDs)
  • Savings Accounts
  • Treasury Bills, Notes & Bonds
  • Municipal Bonds
  • Corporate Bonds
  • Exchange Traded Funds (ETFs)

List of Private Assets

Private Assets:

  • Real Estate
  • Businesses/Franchises
  • Equipment and Machinery
  • Intellectual Property (IP)
  • Precious Metals
  • Fine Art, Collectibles, and Antiques
  • Private Equity Firms and Venture Capital Funds
  • Hedge Funds

 

Are Some Private Assets Liquid?

Private assets have a variety of liquidity characteristics.

For example, if one has gold they want to cash in, if they can identify a willing buyer, they might be able to easily exchange it for cash.

Those with PE, VC, or hedge fund investments might be subject to lock-up periods that restrict how much money they can get out per quarter or they might not be. It depends on the contract.

Real estate investments can be liquidated through a sale or through refinancing.

Businesses and franchises usually require more time to liquidate, but that also depends on the type of business/franchise and its popularity in the market.

 

Are Stocks Liquid Assets?

Yes, stocks are liquid assets.

They represent shares of ownership in a company or corporation and they can be bought and sold on public exchanges like the NYSE, NASDAQ, and AMEX.

When an investor buys or sells stock, it typically takes seconds for the transaction to settle.

This is much faster than private asset investments and makes stocks a great way for investors to diversify and manage the liquidity in their portfolio.

Stocks offer high volatility, but also potentially attractive returns when managed correctly.

With the right strategy, investors can balance their risk/return ratios by investing in both liquid and private assets.

 

Is Gold a Liquid Asset?

It can be in liquid form, depending on how it’s owned.

There are ETFs, futures, options, and other liquid instruments by which gold can be owned. Some gold producers are also publicly traded.

Gold itself is a physical asset and its liquidity depends on the market’s ability to convert it into cash, which can take time.

Therefore, gold is not intrinsically as liquid as stocks or other ETFs, but it can be owned in liquid form.

 

Is a Saving Account a Liquid Asset?

Yes, usually.

Some savings vehicles, like US I-Bonds or CDs have restrictions on how often the funds can be withdrawn.

However, a regular savings account is highly liquid and provides easy access to cash and other assets.

Savings accounts in the US are FDIC-insured, so investors can rest assured that their money is safe in the event of bank failure.

The downside of a savings account is that they usually do not provide a high rate of return as compared to investments like stocks and bonds.

But they provide a safety net, as well as the benefits of liquidity and optionality (e.g., if a compelling opportunity comes along). Moreover, if the rate of return is high enough, allocating more to cash and cash-like securities might make tactical sense.

 

What Are Fixed Assets?

Fixed assets are non-liquid investments that have long-term use and can’t be easily converted into cash.

Examples of fixed assets include real estate, businesses, vehicles, furniture, equipment, and machinery.

Unlike liquid assets such as stocks or savings accounts that can be sold almost immediately for cash, it usually takes much longer to convert a fixed asset into money.

While real estate investments may generate income through rent payments or appreciation in market value over time, they are still not considered liquid assets due to the lack of liquidity in the marketplace.

Fixed assets, generally, are part of a process to help generate revenue.

 

What Are the Liquid Assets on a Balance Sheet?

The liquid assets on a balance sheet include cash, current receivables, and other near-cash assets such as marketable securities.

Cash includes coins and currency, bank accounts, money orders, and other forms of liquid assets.

Current receivables are amounts due to the company from customers or businesses within a certain period of time (usually one year).

Marketable securities are investments that can be quickly converted into cash at a minimal loss in value. They include stocks, bonds, mutual funds, ETFs, and most derivatives.

These three categories make up the majority of a company’s liquid assets on its balance sheet. Other less frequently found items can include prepaid expenses and short-term investments.

Having liquid assets on a balance sheet helps ensure that a company will have enough cash flow available to meet short-term obligations and pay bills as they come due.

 

FAQs – Liquid Assets vs. Private Assets

What is the opposite of liquid assets?

The opposite of liquid assets are private assets (also known as illiquid assets), which include real estate, commodities, collectibles, art, and other investments that cannot be easily converted into cash.

Private assets typically require more effort to convert into money than liquid assets do.

What are the advantages of investing in liquid assets?

Investing in liquid assets provides investors with access to a wide variety of markets and higher liquidity. This makes it easier for investors to diversify their portfolios and manage risk.

Liquid investments also provide investors with quick access to their funds if needed. Additionally, they often provide higher returns than private asset investments such as real estate or commodities.

What are some examples of liquid assets?

Examples of liquid assets include cash, savings accounts, stocks, bonds, mutual funds, ETFs, and options/derivatives.

These assets are easily converted into cash with generally lower transaction costs.

Is a 401k a liquid asset?

A 401(k) is generally not considered part of one’s liquid net worth.

Although you can take out a loan on your 401(k), the money needs to be paid back with interest.

Generally speaking, most investments held in a 401(k) are not considered liquid assets.

What is the difference between a liquid asset and an illiquid asset?

The main difference between liquid assets and illiquid assets is their ability to be quickly converted into cash.

Liquid assets such as cash or stocks can typically be sold for cash within a few days or weeks, whereas it may take months or even years for an investor to convert an illiquid asset like real estate into cash.

Liquid assets also provide investors with the ability to get in and out more easily, meaning they can access their funds more readily than with an illiquid asset.

What is the best way to convert a fixed asset into money?

The best way to convert a fixed asset into money is to sell it in a marketplace that has buyers for the type of asset you are selling.

Real estate, for example, can be sold through the help of an online or local real estate agent.

Commodities such as gold or silver can typically be sold at a pawn shop or on an online exchange.

Collectibles and art can be sold at auction houses or galleries.

There are also online platforms where many types of assets can be listed and sold quickly with minimal transaction costs.

By researching potential buyers and familiarizing yourself with current market prices, you will be better prepared to convert your fixed asset into money.

 

Conclusion – Liquid Assets vs. Private Assets

Liquid assets are those that can easily be bought or sold in the public markets with minimal price impact.

They include cash, money market funds, certificates of deposit (CDs), savings accounts, treasury bills, notes and bonds, municipal bonds, corporate bonds, and exchange-traded funds (ETFs).

Private assets are those owned by individuals that are not traded on exchanges and thus lack liquidity.

Understanding the differences between these two types of assets can help you make better decisions about how to manage your finances and create a more diversified portfolio.

Additionally, it’s important to research potential buyers for whatever type of asset you’re converting so that you get the best price possible.