Most investors have more liquidity than they should – 05/24/2023 – From Grain to Grain

Having liquidity in investments is something very good and important. The ability to liquidate your investments quickly is valuable. However, because it is valuable and because everyone wants it, this feature comes at a cost. Therefore, it is very important to adequately weight the liquidity of your portfolio.

Most investors have more liquidity than they should. The challenge is in estimating how much is adequate. There are two reasons for holding higher liquidity: fear and lack of planning.

Forget the six-month salary rule. It makes no sense for you to have six months of your income in highly liquid assets thinking about an emergency. After all, who spends six months of salary in a single month?

Don’t confuse emergency with lack of planning.

An emergency is not buying a property on impulse. This is lack of planning.

Also, you shouldn’t have high liquidity just because something good might come along. Make no mistake, if you’re not looking, it won’t show up.

If you plan to buy a property and are looking for one, perhaps you should have a lot more than six months of your income in liquid assets.

However, if you are planning to buy in 2 to 5 years, you are missing out on the opportunity to be better remunerated if you have more liquidity.

When we talk about fixed income, the decision to have liquidity can compromise your income by up to 20%.

For example, deciding between a daily liquidity CDB and a 5-year CDB results in earning at least 15% more in the second case. A daily liquidity CDB yields close to 100% of the CDI. A five-year CDB yields more than 115% of the CDI. It is also possible to invest in CDBs referenced to the IPCA that can provide up to 125% of the CDI in the same term.

Considering an average CDI of 10% per year and an investment of BRL 100,000 over 20 years, a CDB with a yield of 120% of the CDI will result in 43% more equity. The difference in 20 years between the CDB that yields 100% of the CDI and that which yields 120% of the CDI is R$ 291.9 thousand, for an initial investment of R$ 100 thousand.

Realize how expensive it is to have liquidity. Therefore, estimating adequate liquidity will provide you with a better result.

The excuse that something bad or a crisis or the government can change does not fit if we are talking about CDBs within the FGC guarantee. Therefore, fear of catastrophe cannot be justified if you invest safely and it is not because you have more liquidity that you are necessarily safer.

In fact, fear is the excuse given for lack of knowledge. If this is the case, research and you will earn more.

To calculate what would be ideal, planning is necessary.

Of course, it is possible that an emergency arises, for example a health situation, and more resources are needed than planned. However, this is rare. If it really were more common, you’d be more concerned about taking out disability and accident insurance than liquidity.

Therefore, plan your expenses and adjust your liquidity to what is necessary. By doing this, you should improve portfolio results and thus achieve your goals faster.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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