Investment Liquidity

Corporate bonds also have lower liquidity than both stocks and US Treasury bonds. The liquidity can vary dramatically depending on the issuing company. Certain bonds can trade frequently, while many individual bonds rarely change hands. This is also true for municipal bonds—debt securities issued by states, cities, counties and other local government entities.

While bond market liquidity can vary dramatically, sellers are usually able to get out of their positions without offering a severe price discount. One way to avoid the potential illiquidity of individual bonds is to purchase fixed income products—such as mutual funds and ETFs. These instruments also allow investors to achieve broader diversification while helping to ensure they can liquidate their investments easily on short notice.

Illiquid Assets: Real Estate, Non-Traded REITs, Annuities and More

Real estate is an example of an illiquid asset. It would be almost impossible to sell your home overnight and receive its market value. The exact price of your home can’t be found scrolling across a market ticker. It could take months and potentially lots of negotiating to find a buyer. Once the deal is closed, the transaction can sit in escrow for weeks. The selling process usually involves inspections, appraisals, commissions and closing costs, which can add time and money.

Non-traded real estate investment trusts (REITs), as their name implies, are also illiquid assets. Unlike normal REITs, they don’t trade on exchanges. Their values are often opaque, making price discovery difficult on the secondary market, where buyers may be few and far between. Even if the prices were more transparent or discoverable, the lack of available buyers limits an investor’s ability to sell at the moment of their choosing.

Annuities also lack liquidity since they are contracts with restrictive redemption terms and many may not be redeemable. Given the contractual nature of annuities, they cannot be sold freely regardless of how liquid the assets in which they are invested appear to be. Stocks and bonds generally have ready markets available to facilitate their sale, drastically increasing their liquidity compared with an annuity.

Other less-liquid assets include private placements and partnerships, which can have long lock-up periods and very limited redemption windows. These features generally make it difficult for investors to access their money. Trading on the secondary market can include more complications. The universe of buyers is small and share values are typically determined by investment companies (e.g., venture capital funds, investments banks or certain private investors), not the open market.

Generally speaking, the more steps an investor must take to convert their asset to cash, the less liquid that asset is. The liquidity spectrum is well illustrated in the liquidity differences between a stock in your investment portfolio and your house. While a piece of real estate may appreciate in value—making it a positive investment—you more than likely cannot realize the gains of that asset’s growth as easily as with a stock or bond.