Understanding Liquidity in Investments

A spectrum of liquidity

Investments sit at different points on the liquidity spectrum:

• Cash and at-call accounts — generally accessible immediately.
• Large listed shares and ETFs — usually saleable within days, at the prevailing market price.
• Smaller listed companies — may be harder to sell in size without affecting the price.
• Term deposits and fixed term investments — committed for a set period, with early access restricted or penalised.
• Unlisted funds — redemptions may be periodic, limited or suspended.
• Private company shares — may be illiquid for years, with no established market.

Why liquidity matters

Liquidity affects an investor's ability to respond to changing circumstances — a job change, a health event, a property purchase or an opportunity elsewhere. If most of a portfolio is illiquid, an investor may be forced to sell liquid assets at a poor time, or be unable to access funds at all.

Liquidity can also change. Investments that are easily sold in normal conditions can become difficult to sell during periods of market stress, and unlisted funds may restrict redemptions when many investors seek to withdraw at once.

The liquidity premium

Investors sometimes expect a higher potential return for accepting lower liquidity, often called a liquidity premium. Whether that premium is adequate — and whether it is achieved at all — varies from investment to investment. Lower liquidity on its own does not guarantee a higher return.

Planning for liquidity

Many investors maintain a buffer of accessible funds before committing capital to longer-term or illiquid investments. Matching the term of an investment to the time when funds will be needed, and staggering maturities, are common approaches. Reading the withdrawal and redemption terms of every investment before committing is essential.

This article is general in nature and does not take into account your objectives, financial situation or needs.