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FP Article 15.9 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Liquidity Risk

by Rajen Devadason

In order to keep the general price level stable, you need to keep adequate liquidity in the system.

Milton Friedman

  Liquidity risk is the type of investment risk an investor takes when she buys an investment that perhaps may not be easily sold again.

Naturally enough, the other side of that coin is the risk of a buyer not being able to buy an investment he might like to own because of a lack of supply.

Most of the time, stocks, mutual funds and unit trust funds have very low liquidity risk associated with them, while property is far more illiquid. 

 

 

 

 

 

 

 



Frankly, liquidity risk usually only becomes an issue for an investor who might need money in a hurry, say, for a personal emergency or if he perceives an impending general economic collapse. In either situation, the investor who has bothered to take the disciplined and savvy step of putting in place a 3- to 12-month emergency buffer fund usually finds liquidity risk to be only a minor inconvenience. But those who don't have their own separate reservoir of liquidity (in the form of cash or near-cash instruments) face difficult times when liquidity risk manifests itself!

This is an article explaining liquidity risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

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The realities of modern day living are such that we know for certain that most investors never get around to adequately funding their emergency buffer fund or cash reserve fund. For such people, liquidity risk is of great consequence; they often find during 'cash crunch' periods that they have no choice but to sell their investments for a song to those who happen to have spare cash.

It is no accident then, that in times of tight liquidity, those who have accumulated large cash reserves often find they can profit from the tight liquidity woes of others by driving hard bargains.

The best ways to avoid liquidity risk is to always maintain a sufficient hoard of ready cash or highly liquid equivalents OR to only invest in highly liquid investments, meaning there are always plenty of buyers and sellers. The larger your hoard of cash, the greater the chances of your profiting from the desperation of others during periods of market or personal illiquidity.

If you'd like to continue to learn more about other types of investment risk, here's additional information for you...

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk

 

 

© Rajen Devadason

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Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
349, Desa Rasah, Jalan Bayan 7, 70300 Seremban, NS, Malaysia
Tel/Fax: +606 632 8955

 
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