The world’s wealthiest people invest their money in office buildings, art, and crypto. Doing your research on these types of assets will bode well for your investment strategy. Some of these are non-liquid assets.
You must be wondering, “What is a non-liquid asset”?. Why are they such a crucial component of wealth management and investment strategies?
In the guide, we’ll cover the difference between a liquid asset and a non-liquid asset. We’ll discuss some of the risks involved and what you can do to mitigate them. Keep reading to get the inside scoop.
What Is a Liquid Asset?
Before we answer the question “What is a non-liquid asset?”, let’s first discuss what a liquid asset is. This will give us the proper framework to work with.
A liquid asset refers to an investment or possession that can be quickly and easily converted into cash without significantly impacting its market value. Investors can sell or trade them rapidly with minimal transaction costs or price fluctuations.
A well-balanced portfolio will have a handful of liquid assets. Let’s look at some of the types of assets that are liquid:
Cash
Cash is arguably the most liquid asset there is. It includes physical currency (banknotes, coins, etc.) and electronic money held in checking, savings, and money market accounts.
Publicly Traded Stocks
You can invest in shares of stocks on public stock exchanges. Investors can sell them on the open market within trading hours. The amount of buyers and sellers contribute to their liquidity.
Blue chip stocks of well-established companies with high trading volumes and strong investor interest tend to be more liquid than stocks of smaller or less-known companies.
Bonds
Government bonds, corporate bonds, and other debt securities that are actively traded can be considered liquid assets. They can be sold on the secondary market before their maturity date.
Money Market Instruments
These are short-term debt securities, such as Treasury bills, commercial paper, and certificates of deposit (CDs), that mature within a year. They are highly liquid due to their short time to maturity.
Exchange-Traded Funds (ETFs)
ETFs are investment funds that trade on stock exchanges and hold a diversified portfolio of assets. They offer high liquidity since they can be bought or sold throughout market hours.
Certain Mutual Funds
Some mutual funds provide daily liquidity. This allows investors to redeem their shares at the end of each trading day.
What Is a Non-Liquid Asset?
As you might’ve guessed, non-liquid assets are those that can’t easily be converted to cash. If you do, it may incur significant losses in value.
Non-liquid assets require more time and effort to convert into cash due to factors like limited market demand, complexity, or legal constraints.
Let’s take a look at some examples of non-liquid assets below:
Real Estate
When pondering the question, “What is a non-liquid asset?”, one of the first things that’ll pop into your mind is real estate. Properties can hold immense value but selling a property can become a time-consuming process.
This is because the real estate market can experience fluctuations. Finding the right buyer may take months or even years. This depends on factors such as location and economic conditions.
Private Equity
Private equity is when you invest in private companies. You can hold these types of investments for several years. This is because there isn’t a readily available market.
Investors often need to wait for an acquisition or an initial public offering (IPO) to exit their investment.
Collectibles and Artwork
Valuable collectibles such as rare coins, vintage cars, and artwork are all considered non-liquid assets. Their value can is determined by market demand, supply dynamics, geopolitical factors, and environmental regulations.
Long-Term Investments
Certain long-term investments, like certificates of deposit (CDs) with early withdrawal penalties or long-term government bonds, are non-liquid. This is due to the time commitment required before they mature.
Venture Capitalist Investments
Venture capitalist investments are similar to private equities. Investments in startups and emerging businesses often lack a ready market, making them non-liquid assets until an exit opportunity arises.
Retirement Accounts and Annuities
While these assets provide long-term financial security, withdrawing funds from retirement accounts or annuities before the designated age can lead to penalties and decreased value. This classifies them as non-liquid assets.
Advantages and Disadvantages of Non-Liquid Assets
Non-liquid investments have the potential for high returns and diversification opportunities. There are certain risks to be aware of like limited access to funds during emergencies and vulnerabilities due to changes in market conditions.
Since they’re illiquid, this can lead to financial strain. You may need to accept lower prices as a result.
There is a lack of transparency and standardization in certain non-liquid markets too. Investors may have a hard time assessing risks quickly due to limited public information on certain non-liquid assets.
To mitigate some of these risks, you’ll want your portfolio to be well-balanced with liquid and non-liquid assets. Carefully evaluate these types of investments so that you can make more informed decisions.
Follow Your Financial Path
Understanding what is a non-liquid asset is crucial for any investor aiming to build a diversified portfolio and achieve long-term financial goals. While they may require patience and careful consideration, the potential rewards of holding non-liquid assets can be significant.
As with any investment, it is essential to assess your risk tolerance, financial objectives, and time horizon before incorporating non-liquid assets into your portfolio. Follow our blog to stay in the financial loop.