Liquidity needs should be factored into asset allocation decisions from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
When constructing an investment portfolio, it is crucial to consider your liquidity needs. Liquidity refers to how quickly and easily an asset can be converted into cash without significantly impacting its price. In other words, it is the ability to access your funds when you need them. Liquidity needs should be factored into asset allocation decisions because they play a vital role in determining the overall risk and return profile of your portfolio. If you anticipate needing to access a portion of your investments in the near future, you will want to ensure that those assets are liquid enough to be easily converted into cash without incurring substantial costs. On the other hand, if you have a longer time horizon and do not anticipate needing to access your funds in the near future, you may be able to allocate a larger portion of your portfolio to less liquid assets, such as real estate or private equity. These assets typically offer higher potential returns but may be more difficult to sell quickly if needed. By considering your liquidity needs when making asset allocation decisions, you can ensure that you have the right mix of liquid and illiquid assets to meet your financial goals while also maintaining the flexibility to access your funds when necessary. This approach can help you strike a balance between risk and return that is appropriate for your individual circumstances and objectives.
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