An investor's guide to balancing liquid and illiquid assets (2024)

FAQs

What is the difference between liquid and illiquid assets your answer? ›

Liquid assets can quickly convert into cash, despite adverse market conditions (like market regulations), and with an immediate time horizon. Illiquid assets are difficult to convert into cash, which gets worse if the market suffers.

A liquid asset is one that can be quickly sold without a significant loss in value; an illiquid asset is one that can't be quickly resold without a significant loss in value.

Stocks and other readily salable securities are considered liquid assets, unless they are restricted by IRA, 401(k) or other similar requirements. IRAs, 401(k) plans and other similarity qualified retirement accounts are not considered to be liquid assets.

Are Retirement Accounts like IRAs and 401(k)s Liquid Assets? Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s are not really liquid until you've reached age 59 ½.

When a certain asset is illiquid it is usually more difficult to find counterparties to trade with at a reasonable price. Therefore, the costs associated with transactions in illiquid assets can become large. For some assets, legal impediments make it sometimes impossible to trade in a timely manner at all.

Some examples of inherently illiquid assets include houses and other real estate, cars, antiques, private company interests and some types of debt instruments. Certain collectibles and art pieces are often illiquid assets as well.

While your credit can increase your liquidity, it is not a liquid asset. Liquid assets are just that: assets. They're worth something and can be sold if you ever need cash for another purpose. A credit card doesn't have intrinsic value.

Non-liquid assets can be difficult to convert into cash or cash value, and can come with a significant loss in value. For instance, real estate is never liquid. You might have significant equity in your home, but using that equity to pay for the costs associated with a sudden health emergency may be challenging.

“The main drawback of a CD is that it's an illiquid asset unless you're willing to pay the early withdrawal penalty," said McHugh.

Cash on hand is considered to be a liquid asset because it can be readily accessed. Cash is a legal tender that a company can use to settle its current liabilities. The money in your checking account, savings account, or money market account is considered liquid because it can be withdrawn easily to settle liabilities.

Is a car a liquid asset? ›

In most cases, a car isn't a liquid asset. It may take some time to sell, you may incur costs in converting it to cash, and it probably won't sell for the same amount you put into it. In some cases, it may not sell for even the current market value, especially if you're trying to turn it into cash quickly.

The liquid assets are considered important as they can be used to convert into cash when there is a financial problem in an individual or business owner's life. The non-liquid assets include furniture, real estate, cars or recreation vehicles.

Liquidity refers to the ease with which an asset can be converted into another asset like cash without affecting its market price. “Illiquidity” in essence occurs when an asset cannot be traded or sold with ease and without incurring a loss in value relative to its “fair market” value.

Key Takeaways

Liquidity is sufficient cash on hand to meet financial responsibilities. Liquid assets may be cash or property that can readily be converted to cash without a substantial loss in value.

Assets are money gained from your job, while liquid assets are money gained from sources such as investments or inheritances.

Answer and Explanation:

An example of a highly liquid investment is a U.S. Treasury bond. An example of an illiquid investment is a private equity interest, which could entail a lock-up period as well as a shallow market with minimal buyers and sellers.