Building a sizable nest egg is a crucial aspect of creating a secure retirement, and there are several factors you must weigh carefully when accumulating assets. Chief among them is the liquidity of your various investments. Liquidity simply refers to how easily you can convert a particular asset into cash if you need to. It's especially important when choosing between tangible assets and more traditional investment products, such as stocks and bonds.
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Tangible assets are assets that have a physical presence. That includes things like real estate, land, precious metals, currency, antiques and other collectibles that appreciate in value. These kinds of assets may appeal to a buy and hold investor, who hopes to sell them for a profit down the line. The U.S. Trust 2015 Insights on Wealth and Worth study found that eight in 10 high net worth investors under the age of 50 either own or have an interest in adding tangible assets to their portfolio.
There are some clear upsides of investing in tangible assets in terms of:
The biggest drawback associated with tangible assets is their liquidity – or lack thereof. If you need cash quickly and the bulk of your assets are tied up in something like timberland, finding a buyer in short order can be very difficult. Even if you do find someone who's interested in purchasing the property, the potential buyer may try to undercut you on the asking price if he gets the sense that you're desperate to unload the investment. That's where classic investment instruments can prove to be a valuable component of your retirement plan.
Securities such as stocks, bonds, mutual funds, money market funds and certificates of deposit (CDs) are a key part of any retirement portfolio. Compared to real estate or currency, these assets have the edge where liquidity is concerned. If you've accumulated a substantial amount of a stock in a particular company, for instance, you can sell your shares on the market and have the cash show up in your account in just a few business days. The same goes for mutual funds or money market funds. The common thread among these types of investment vehicles is that they can easily be converted to cash in a pinch. You're not locked into a lengthy holding period the way you would be with a REIT or a piece of property.
That being said, it's important to remember that even though these investment vehicles are far more liquid than tangible assets, they're not created equal. The individual risk profile and rate of return can vary widely from one asset class to the next. At one end of the spectrum you've got stocks, which tend to bring in a bigger payoff but are also the most vulnerable to market fluctuations. At the other end are bonds, CDs and the like, which are exceptionally safe investments, but the trade-off means accepting a lower rate of return.
Both categories of assets have their strong points. Whether you should invest in one, the other or both ultimately depends on your investing style and your long term savings goals. The increased liquidity of investment vehicles such as stocks and bonds certainly makes them attractive if you want to be able to get your hands on cash quickly in retirement. At the same time, tangible assets can act as a hedge against inflation and market swings, so it's important to evaluate how the two can complement each other in your retirement portfolio.
If your portfolio has a significant proportion of tangible assets, make sure that it also has enough liquidity so that you can make regular withdrawals to support yourself – and that you've considered when and if you want to liquidate tangibles to add to your income stream. That's where a financial advisor can come in handy. What's the Best Retirement Drawdown Strategy for You? will give you some factors to consider.