We tell you immediately and bluntly: too much liquidity is bad. Yet it seems that Italian savers have a certain passion for excessive liquidity in their portfolios (as the survey on savings and financial choices of Italians - 2016, by the Einaudi Center tells us). Many would like to keep the money under their mattress or in their piggy bank. But it's not the right way: if you want to defend your savings you have to do it the right way.
In fact, many savers ignore some crucial factors when investing. Which have enormous relevance in deciding how much liquidity (or cash, or very short-term investments) to hold.
Five reasons not to exceed with liquidity
1. It is not true that liquidity is not risky: the danger is that it will be eroded by inflation.
In fact, the real return on liquidity is very low, or more often negative (“real” means that the erosive effect of inflation is taken into account). Leaving the money "under the mattress" in Italy, from 1900 to 2016, would have yielded an average of -8,2% in real terms every year. That is, year after year, it was impossible to buy 8,5% of the goods and services bought the previous year. Not a great performance, right? And historical data shows us that inflation should never be underestimated.
2. History teaches us that long-term stock markets go up. Just take a casual look at the following graph to realize it. And let's talk about real returns, which take inflation into account). Bonds are also doing well. Liquidity, on the other hand, is far behind in the rankings.
3. Forget trading.
If you think you are smart and use liquidity as a reservoir, to launch yourself into market timing, i.e. buying and selling, playing "in and out", trying to beat the market, know that odds and history play against you . Simply put, investors tend to buy funds or ETFs that have had a good performance too late, and sell them soon after poor performance. Exactly the opposite of what should be done.
4. Having too much cash makes you a spendthrift. It's a psychological question: if the current account balance is too large, you risk falling into temptation and buying things you don't need. However, if the money is invested, it will be more difficult for you to divest to chase the lure of frivolity and you will instead be more inclined to follow your financial planning.
5. It is advisable to remain invested in stocks and bonds, in the appropriate proportions your goals and the expected life of the investment. Even if this means a little beating from time to time, in the long run it pays off. A lot of. Because the risk of not being invested in the "right" days is too high.
Liquidity ok, but not too much
A little available liquidity is needed, of course. Liquidity is essentially used to pay current expenses (for example mortgage installments, rent, food expenses, school) and to deal with unexpected events.
But how much cash? Indicatively, it is the opinion of many experts that the cash reserve should be approximately equal to two months' net income (some say even more), but in reality this is a very personal matter. To illustrate, a large family with children will probably need a bigger cash reserve than a XNUMX-year-old single with a good pension. So whoever has a volatile income from work, because he is (for example) a freelancer, will probably have to hold more liquidity than an employee with a fixed salary, other things being equal. If you have a life insurance policy that effectively covers medical emergencies, your cash buffer may be lower. And so on.
So, properly measure your cash needs, and don't hold a higher share of cash than you need to, if you want to invest efficiently.
SOURCE: AdviseOnly
