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February 07, 2009


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An excellent post. I think that liquidity is one of the most overlooked aspects of investments. Ignoring it has caused a lot of problems lately, from the auction-rate-note fiasco to the disasterous confluence of structurally illiquid mortgage bonds and mark-to-market rules.

There are a very wide variety of liquid investments available to individual investors and there is really no reason for most people to go beyond what's priced in the newspaper every day. (Figuratively. Newspapers stopped printing stock listings years ago.) Too often investors are lured into illiquid deals on the theory that because it is not liquid and has the "allure of exclusivity", it must be more profitable. It may or may not be, but even if it is, you don't get something for nothing.

Great post, very informative.

I take exception to this statement though:
"Even individual bonds fall in the middle of the spectrum. If you buy an individual bond this week and then try to sell it next week, it will lose some of its value."
Did you by any chance mean to say "it MAY lose some of its value"? What if the interest rates went down during this week? What if the company credit rating was upgraded or reaffirmed (when everyone expected a downgrade) or some good news came out during the same week? A couple of AA and AAA municipal bonds I bought last November increased in value the following week and have been increasing in value ever since. I bought them below par, and now both are selling above par. I am actually considering selling at some point if the yield starts getting less attractive.

"In the recent credit crunch, bonds that fell from investment grade to junk status were suddenly extremely difficult to sell. As a result, the price you could get for them dropped more sharply than it might have otherwise."
In fact in the recent credit crunch a lot of investment grade bonds as well as AA and AAA municipal bonds lost their value too creating a great buying opportunity. At the height of the credit crunch you could get Johnson and Johnson bonds with a ridiculously high yield. I bought Goldman Sachs bond in December with a yield of over 8%. It's up now. Yes, it's a financial company and all, but hardly a junk bond.

I do agree that one must be prepared to hold to maturity, but you can sell at a gain as well as at a loss - it all depends on timing.

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