Back to Basics..Asset Allocation

Perhaps a recap of salient points from earlier blogs:
What is asset allocation?
For most of the population, asset allocations is deciding if they can afford to take the kids to a movie, or only go to the park and hope there's no icecream vendor.
Kids, as anyone who has them know, are a money sponge. Life has many money sponges, golf, slot machines, boats, any mechanical device, and the mother of all sump holes, a house.
I'll visit the joys of home ownership in later posts.
But, we are discussing a different sort of asset allocation. We mean in an investment portfolio.
Assets come in simple to understand forms:
-Liquid assets
No, not vodka and wine, joyous as they are. Stay with me here, I mean that is either cash, or can be turned into cash easily. Money market accounts, short-term CDs, listed stocks and bonds, including mutual funds.
Liquid assets may or may not give you back the same amount of money you put up. Cash is cash. $100 bucks in the mattress is $100. (Inflation or mice may eat it, but that's not what I
mean.) Money in a savings account or money market fund will earn a little interest, you can get at it fairly easily and it will give you back no less than what you put in.
Liquid assets like stocks and bonds are also easily turned into cash (exceptions noted below) but may give you more, or less, than what you put in. That's called risk. Risk has advantages, we'll talk about risk more down the line.
-Illiquid assets are those that can't be unloaded easily. Like spouses and houses.
Whether your spouse is an asset or liability is fungible, and changes for day to day, even minute to minute.
I consider an illiquid asset anything that takes more than a week to turn into cash, or involves an attorney.
Some stocks and bonds start out liquid, then petrify and become illiquid. Owners of adjustable rate preferreds, some mortgage backed paper and auction rate securities found this out the hard way, by experience.
Here's a couple of rules:
-Everything is liquid until there are no buyers
-It's far less stressful to learn from someone else's mistake
As Lily Tomlin said, "Don't be afraid of missed opportunities. Behind every failure is an opportunity someone wishes they had missed."
Illiquid doesn't necessarily mean worthless. Auction rate securities, other adjustable rate paper may still pay the interest or dividend. You just can't sell it because the buyers are gone.
Given the number of stocks and bonds on the market, it doesn't happen very often. It happens most when some securities dealer has a 'New Idea.'
Here's another rule:
-'New Ideas" are frequently the types of securities caught in this quicksand.
The premise that a security would 'adjust' the dividend based on market conditions sounded great. Your principal stayed intact, you get a yield higher than CDs, for instance, and the rate would fluctuate with some interest benchmark. Except when new buyers decided they wanted no part of them. Old owners had no one to sell them to.
The lesson is, if the security you are interested in doesn't have a reasonable amount of daily trading, you may find that you can't sell it when you wish. That may or may not be a bad thing, but it isn't liquidity.
Nest, we'll do more detail on asset allocation. Stay in touch.