Investors need a balance of liquid and illiquid assets
in their portfolios if they are to take advantage of potential
investment opportunities.
In the context of portfolio management, the term
'liquidity' describes how easy it is to convert an asset
into cash. An asset that is difficult to convert quickly into cash
and without significant loss of market value is known as
'illiquid'.
Cash is usually the most liquid asset, with real estate
typically sitting at the opposite end of the spectrum. Equities and
bonds lie somewhere in between, although there can be significant
variations within these broader categories. Government bonds and
FTSE 100 stocks are generally highly liquid, while smaller company
stocks and sub-investment grade bonds can be illiquid. Cash itself
can sometimes be illiquid if, for instance, it is placed on term
deposit.
