Within the scope of the classification of investments, we have sought to deepen some knowledge in the three variables that we consider fundamental for the classification of any investment.
We talked about expected return, where we refer to the existence of a risk-free asset and a risk premium. We talked about risk, having talked about the specific risk and the market risk. And now we will talk about Liquidity, thematic closely linked with the Time horizon of Investment.
What is Liquidity
In a nutshell and repeating what we have already mentioned, Liquidity is the possibility or facility in turning any asset into cash. That is, in selling an asset, at a fair price (identified as the market price, in the case of an efficient market), quickly.
How to Frame the Liquidity with the Temporary Investment Horizon
In fact, these two themes are complementary, since, depending on the time frame in which we intend to demobilize an investment, we can invest in more or less liquid assets. For example, if we want an investment for the short term, say 1 year, it does not make sense to buy a home. If we want an investment for 10 years, maybe the use of term deposits alone does not make much sense.
The Temporary Investment Horizon
You certainly remember that when you visit a branch for information about investments, you are given some advisable deadlines for an investment:
- Government Obligations – 1-2 years of Investment;
- Actions – Minimum 3 years.
It is obvious that we can get good returns by not meeting these deadlines. However, it is advisable to keep investments for as long as possible, the longer the time, the greater the likelihood of obtaining reasonable returns.
Do not confuse, however, with risk incurred. That is, the longer an investment, the greater the risk, not the other way around.
Why do you recommend these Deadlines?
If you remember in our article about risk, risk is not something bad to start with. Risk is uncertainty. Applying to this case, the larger the horizon, the greater the uncertainty, but also the greater the likelihood of the return coming to its side.
In this way, you will be more likely to achieve your return targets, which gives you some additional security.
And the Horizon Time in Asset Management?
Although they recommend you these deadlines, fund managers have very different deadlines. That is, the deadline for a manager is 31 December. Let us never forget that the work of a manager is always at risk. It has to show good returns and, if possible, be better than the competition.
What does this mean?
It means that if the end of the year the manager is far from fulfilling his goals, he will do everything to achieve it, which results in an excessive risk taking and something irresponsible. However, if you have already achieved your goals, you are likely to reduce your risk so do not spoil the year and hence your performance bonus.