One term used in investing is liquidity. Investments are referred to as liquid if they can be easily converted to cash. Do you know which investments are liquid or illiquid?

Cash is the ultimate liquid investment. Money market accounts, checking accounts, and savings accounts are liquid as well. They are referred to as cash accounts.

Liquidity does not mean that you will not lose money. Stocks, bonds, mutual funds, and ETFs qualify as liquid. They can be converted to cash quickly. This is because they are traded in markets with lots of players and activity. This provides enough buyers for those who are selling.

Illiquid investments are those assets that either trade very thinly or require considerable work to find a buyer. Houses are an illiquid asset. It takes a lot of time and work to find a buyer willing to purchase your house. Many potential buyers may view the house before one is willing to buy. Then there may be counteroffers before a price is agreed upon and settlement takes place.

The housing market is vast. There are, usually, many people looking to buy and sell. The illiquidity comes from finding the right one and the length of time to complete the sale. Other assets are illiquid due to lack of buyers and sellers. These markets are referred to as thinly traded. Assets in thinly traded markets may sell for prices that are much higher or lower than anticipated.

Antiques and collectibles fall into this category. There are lots of collectors, but they vary in their chosen interest. Finding someone who is interested in what you have to sell can be difficult, especially if the collectible has fallen out of favor. The next difficulty comes with trying to find a buyer willing to pay the price you want. The collectible may need to be sold for less if you are in need of cash.

Most stocks, bonds, and ETFs are easily converted to cash. But some of these assets are illiquid too. This is because there is low volume of the asset making it thinly traded. You may have to accept less for these types of assets in order to get a buyer.

There is nothing wrong with holding illiquid assets. They can be profitable investments. You do want to have liquid assets though. This allows you access to cash if you need it. That lets you have time to sell your illiquid assets for their full value.

Life happens. Sometimes you need quick cash. A balance of liquid and illiquid assets offers you quick cash potential while leaving you with time to sell other assets at full value.


Are you interested in a simple portfolio to save for retirement? Please check out my book on building a simple retirement portfolio that is available at Amazon.com:

Investing $10K in 2014 (Sandra's Investing Basics)