Hi everyone Please excuse if this question is trivial and/or dumb. I do not fully understand the “liquidity constraint” part in the individual/institutional PM part. Generally, does liquidity refer to every outflow of cash or just unexpected events, e.g. some emergency cushion? If, say, an elderly couple needs 10k/month for living expenses, would that count as a liquidity constraint? What about some statement like “they want to be able to withdraw 50k at any point to cover unexpected expenses”? And something like “they plan to give 100k to charity in exactly 2 years”? Would all of these cases be treated under the liquidity sections of the IPS? Thanks, regards, OA
My opinion is … I do not fully understand the “liquidity constraint” part in the individual/institutional PM part. Generally, does liquidity refer to every outflow of cash or just unexpected events, Both. But only unexpected events in the first time horizon. e.g. some emergency cushion? If, say, an elderly couple needs 10k/month for living expenses, would that count as a liquidity constraint? Yes, If they want that 10k as outflow from their Invested assets. What about some statement like “they want to be able to withdraw 50k at any point to cover unexpected expenses”? Yes, this is also a liquidity constraint to invest in cash or cash equivalent assets. And something like “they plan to give 100k to charity in exactly 2 years”? If the first time horizon is atleast 2 years, this is also a liquidity constraint. Would all of these cases be treated under the liquidity sections of the IPS? Yes.
I am trying to fully understand this too. I am with GSG except for the first part. I would not consider the 10K as a liquidity restraint because if it is on-going it should be taken care of in the return requirement. I also would say the one-time expenses have to be unexpected either. I could be wrong though and would like to hear more discussion on this topic.
mwvt9 Wrote: ------------------------------------------------------- > I am trying to fully understand this too. I am > with GSG except for the first part. I would not > consider the 10K as a liquidity restraint because > if it is on-going it should be taken care of in > the return requirement. Yes but it needs to be in there so you don’t invest the dividends. Like if you need 10k a month an the portfolio generates 10k a month you would put the liquidity info in there so that it is clear to keep the portfolio income in cash to meet the needs. > I also would say the one-time expenses have to be > unexpected either. If they have any extra liquidity needs it needs to be in there. Even if a 50k expendature is “unexpected” if they want to be able to cover it in an emergency you should document that and keep the extra cash on hand. Feel free to disagree - this is just how I think of it. I have read the curriculum on this section but mostly I feel I know about it because my job has a lot to do with IPSs. There are many different interpretations though I am sure (ie - the CFA way, the real world way, the right way, etc).
Dwight Wrote: ------------------------------------------------------- > mwvt9 Wrote: > -------------------------------------------------- > ----- > > I am trying to fully understand this too. I am > > with GSG except for the first part. I would > not > > consider the 10K as a liquidity restraint > because > > if it is on-going it should be taken care of in > > the return requirement. > > Yes but it needs to be in there so you don’t > invest the dividends. Like if you need 10k a > month an the portfolio generates 10k a month you > would put the liquidity info in there so that it > is clear to keep the portfolio income in cash to > meet the needs. I just read the section and I now think you and GSG are right about the 10K. > > > I also would say the one-time expenses have to > be > > unexpected either. > > If they have any extra liquidity needs it needs to > be in there. Even if a 50k expendature is > “unexpected” if they want to be able to cover it > in an emergency you should document that and keep > the extra cash on hand. > I left a word out in my explanation above. I meant to say that they DON’T have to be unexpected to be included. I was responding to what GSG originally said (although the rest of his post seems to agree with me on this point). > > Feel free to disagree - this is just how I think > of it. I have read the curriculum on this section > but mostly I feel I know about it because my job > has a lot to do with IPSs. There are many > different interpretations though I am sure (ie - > the CFA way, the real world way, the right way, > etc).
I gotcha. That makes sense now.
mwvt9: We are on the same page. i picked up “unexpected” from the original post. The point i was trying to make is “first time horizon” not “unexpected”. Thx