We recently worked with an extended family where the matriarch had spent many years investing in illiquid assets—assets that cannot be easily converted into cash—such as income property, fine art, collectibles, and rare books and manuscripts. Issues arose when the grandmother needed to generate cash, and her solution was to sell one of the paintings.
In our experience, investors with high-value illiquid assets are often emotionally attached to them, such as a California mansion that has been in the family for generations or a Picasso bought at auction by a great-great-grandparent. Unfortunately, the children and grandchildren often don’t want the Picasso or the mansion. They want to ensure that their elders have the money to be well taken care of during their lifetime. Then, when it’s their turn for the family wealth, they are only interested in the money.
Relying on illiquid assets for spending needs poses significant risks because of the inherent lack of liquidity. Unlike cash or easily tradable securities, illiquid assets cannot be quickly sold or converted to cash without potentially incurring substantial losses. Finding a buyer can be time-consuming and costly, often requiring specialized brokers and extended marketing periods. Furthermore, market conditions can significantly affect the value and marketability of these assets, leading to possible financial shortfalls in urgent situations. Counting on illiquid assets for immediate financial needs can result in inadequate funds when most needed, highlighting the importance of maintaining a diversified portfolio with a balance of liquid and illiquid assets to ensure financial stability and flexibility.
As part of the Ten Year Rule, the money you will need to spend within the next 10 years should be put in bonds to cover your known liquidity needs. Other investable assets should be in growth investments such as stocks. Stocks are easily sellable and can be converted to cash in a matter of days should something catastrophic happen and you need to rely on your portfolio.
This is not to say that you shouldn’t invest in these alternative assets or that they don’t have a place in an investment portfolio. Be conscious of position sizing and that your liquidity needs are covered. Then, you can venture into other assets or high-value hobby collectibles as part of your portfolio. Even with a pure stock portfolio, we don’t recommend any one asset be more than 5% of your overall portfolio. You don’t need 50% of your assets in fine art unless the other 50% of your portfolio covers your needs.
If generational wealth is tied up in illiquid investments, you can’t reverse what has already been done; however, you can start planning how to unwind it. Determine the cash flow requirements and explore the avenues to convert these assets to cash. You may be able to keep some of the sentimental items while working through the process of liquidating the other assets. Keep in mind, this is a multi-year process. You have to dollar cost average out of these instruments because every time you sell, there is a potential tax situation.
If you have questions on how to handle an illiquid asset in your portfolio, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the July 20, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
