Recently I’ve been thinking about diversification and liquidity of assets. I realized that I didn’t pay much to what would happen to the liquidity of my assets in the case of a financial crisis, probably just like many other people. Most of my assets weren’t crisis proof even though they were diversified. So when crisis knocked on my door I wasn’t ready to react accordingly…

Nobody could predict a global financial crisis like what we have now. Consequently almost nobody had a good plan on how to invest for such a situation. In Ukraine, where I have some equity, the stock market has fell from about 1300 points (highest point) to about 200 points in less than a year. Because of a strong dependency on foreign investments the liquidity of the Ukrainian stock exchange fell significantly for even the most liquid stocks as investors shorted their positions in emergency markets. A similar situation was also occurring in Ukraine’s banking system. Before the crisis many Ukrainian banks were selling low profit bonds in Europe to raise capital and give loans inside the country. As soon as the financial crisis spread to Europe the Ukrainian banks could no longer get enough funds to finance the Ukrainian economy. This insufficient funding for the economy lead to the increase of the discount rate. People unable to get cheap loans started to withdraw money from their saving accounts. With time this turned into a panic among the citizens so the central bank had to set moratorium on the withdrawal from saving accounts.

As a result of the financial crisis many people in Ukraine who had highly liquid stock investments and even bank deposits couldn’t access their funds when they were necessary. The point I want to make here is that when planning a diversified investment portfolio one must also take into account the liquidity of investment instruments as well as risk and profit. When local financial crisis becomes a global financial crisis and the global economy shrinks the liquidity of investments becomes even more important than possible risk or profit.

-O.

The second opinion:

I like to keep myself as liquid as possible so that I can quickly take advantage of investment opportunities I come across. However the situation O. described is very difficult to plan for. It is difficult to expect that something extremely liquid like stocks or even cash could suddenly become impossible to access. Even though things aren’t great in America right now you can still always find enough buyers to sell unwanted shares of stock. I think that these unexpected changes in liquidity are part of the risk you accept if you choose to not invest in a mature economy. That being said most people don’t plan for these extreme situations and it is something good to consider instead of ignoring as impossible.

-T!