Stableford Capital Insights

Why Liquidity Management Matters: Staying Flexible and Nimble

Liquidity management of an investment portfolio is a delicate balancing act. Well-trained investment managers understand how liquidity works with overall market conditions to keep risk levels low for their clients’ investments.

Liquidity is key to keeping your investment portfolio during tumultuous times - giving you the flexibility to adjust your holdings according to market conditions. That flexibility has been key during the 2020 market crisis - and as the bond market continues to ripple in early 2021.

How Liquidity Management Works

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Injecting More Money = More Money to Buy Stocks

For the past year, the Federal Reserve has been acting as the master puppeteer by seeking to get more money flowing into the market. The Fed sets the policy here, while the U.S. Treasury does the heavy work, following the Fed’s recommendations.

The U.S. Treasury has a couple of tools for this; its main cudgel is manipulating the federal funds rate, which is a one-day, overnight rate for banks.

The goal: bringing down yields, which means that Bond Prices Rise.

And lately, with the Fed Funds rate reaching zero percent interest rate -- the Fed started Quantitative Easing (QE), which is directly buying bonds and other securities from commercial banks in the open market.

The result? Lower interest rates. When interest rates fall, it is easier to get access to capital to buy and sell securities. And voila! The stock market has been effectively juiced. Cheaper capital keeps the market liquidity levels high. Liquidity gives the market an extra bit of assurance that there will be buyers ready to trade.

What About Your Portfolio’s Liquidity?

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On the other end of the scale, liquidity means how easy it is to convert anything you own into cash. Think: pawnshops and jewelry - an easy source of cash for emergencies for many working-poor families who need an injection of cash to pay the rent or keep the lights on.

For an investment portfolio, the market’s liquidity levels make it easier for an active investment manager to remain nimble. When investments need to be rebalanced, investment managers can easily sell items and use that cash to purchase other stocks or bonds. In a portfolio with assets that cannot be sold easily - losses can incur.

At times of shock, converting illiquid assets to cash to build flexibility is very expensive. Finding an umbrella in a rainstorm might be impossible or very costly. - Myron Scholes

Liquidity Management Helps Cut Losses

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Liquidity helps money managers cut losses with poor-performing items. Or, in some cases, a category might perform really well but needs to be pruned back to prevent a portfolio from becoming too over-dependent on the returns from that category. Our investment managers actively work to avoid portfolio drift, or a tendency to become top-heavy with some categories because of market changes. Portfolio drift will put your entire portfolio at risk if that sector falters; good investment managers will prune holdings carefully to keep a balanced, healthy portfolio that reduces risk and meets the client’s long-term goals.

Liquidity enables investment managers to pivot according to market conditions -- and take advantage of bargains or overlooked sectors.

How Stableford Can Help Your Portfolio

The Stableford 50+ looks for these sectors, and for best opportunities for appreciation while keeping risk below market levels. Talk to our experts about your needs by contacting us at Stableford. For more in-depth analysis during these interesting times, request a trial subscription to our digital market blast.

Andrew Brinkman
Andrew J. Brinkman is the Founder of Stableford Capital. Over the course of his 45+ year career, he built A.J. Brinkman & Co., a leading foreign exchange arbitrageur and institutional floor broker, was a managing partner of Petros Capital, a long/ short institutional hedge fund and, for the past ten years, he has been a discretionary asset manager for high net-worth families. Andrew Brinkman has been a member of the Chicago Mercantile Exchange, the New York Futures Exchange, and the Chicago Board of Trade. A 1978 graduate of Cornell College with degrees in Economics and Political Science, he was a board member for ChildHelp USA, a board member of the Berry Center for Economics, and former trustee of Cornell College.