The Difference between Liquid and Illiquid Assets

A Certified Financial Planner and Chartered Financial Consultant, Lucas “Luke” Noble of North Andover, Massachusetts, holds a bachelor of science in finance from Salem State University. Through his North Andover-based firm Noble Financial Group, LLC, Lucas Noble provides clients with unique and personalized financial advice spanning a wide range of topics, including asset allocation between liquid and illiquid investments, which is key to investment success.

When it comes to investments, liquidity refers to how quickly an asset can be sold without it negatively affecting the price. Assets that are capable of being sold almost instantly without giving up meaningful value are regarded as liquid. Liquid investments, including large-cap stocks, treasuries, and cash, are quickly converted into cash at fair market prices and are capable of being bought and sold within a small amount of time, from a few seconds to a day. Investors value liquid assets and often pay more to include them in their portfolio.

Meanwhile, illiquid assets cannot be easily sold without sacrificing the meaningful value of the asset. Long-term bonds, for instance, are seen as illiquid, as are private equity investments and real estate investment trusts (REITs). While illiquid assets still have a place in investment portfolios, they do expose investors to more volatility since they hold the investor’s money for a longer amount of time, thus leaving it open to market fluctuations.