FP Article 15.9
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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
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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!
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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
