When you will need the money

What are time horizon and liquidity?

Your time horizon is how long until you need the money in your hand. A sister’s wedding in six months, a motorbike in three years or retirement in 25 years: each has a different horizon. The longer the horizon, the more time you have to ride out ups and downs along the way.

Liquidity is how quickly, how cheaply and without losing value you can turn an investment into cash. Money in a savings account can be withdrawn almost at once. Selling land or a flat can take months, and if you are in a hurry you may have to accept a lower price.

Why it matters to an investor

• To understand risk properly: a price fall becomes a real loss when you are forced to sell at a bad time. When you need the money decides how likely that is.
• To avoid the cost of forced selling: cashing in early often cuts the profit on savings schemes, and selling in a hurry can mean a lower price for shares or land.
• To treat money for each goal separately: instead of one big pot, it becomes easier to plan each goal by its own timeline.
• To stay calm: knowing when you need the money makes panic decisions less likely when markets fall.

Sorting money by when you need it

Many people think of their money in three groups: near money (needed within a year or two), medium money (roughly three to five years) and far money (five to ten years or more). The cut-offs are not hard rules, just a way to organise your thinking.

For near money, the real question is “will the full amount be there on the day I need it?” For far money the question changes to “will it grow faster than inflation?” Over long periods there is time to recover from swings, but the damage from inflation keeps adding up.

Liquidity can vanish suddenly

Shares are usually seen as liquid, because you can place a sell order on any trading day. But Bangladesh has shown that this is not always true when you need it. In the first three months of 2020 the DSEX fell about 19%, reaching about 3,603 points on 18 March. Trading was then suspended for a while during the nationwide lockdown.

For about 18 months, from July 2022 to January 2024, the regulator BSEC set a “floor price”, a minimum price, on almost all shares. Shares could not be sold below it, so many had hardly any buyers, and investors could not sell even when they wanted to. After the floor was lifted, the index fell more than 15%.

• The lesson: even if an investment is liquid on paper, there is no guarantee you can sell at a fair price on the exact day you need the money.

Liquidity has a price

• Money you can withdraw at any time usually earns less. Agreeing to lock money away for longer usually earns a higher rate.
• Cashing in a term deposit or savings certificate early usually means a lower profit rate. The rules differ by scheme and over time, and can change.
• Things like land, flats or your own business take time to sell, carry agent and paperwork costs, and leave you with little bargaining power if you are in a hurry.

Worked example

Common mistakes

• Never asking “when will I need this money?” before investing.
• Assuming shares or anything else can always be sold at a good price on any day.
• Looking only at the return without reading the early-encashment terms and costs.
• Keeping long-term money so cautiously that it cannot even keep up with inflation.

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