Should You be Less Concerned about Liquidity?

Liquidity or lack thereof tends to be a major concern when it comes to annuities.

Many financial advisors and consumers are reluctant to use annuities because money allocated to annuity products tends to be tied-up and inaccessible for a period of time.  In other words, annuities lack liquidity or are “illiquid.”

In contrast, exchange traded funds (ETF) or shares of IBM stock are highly liquid as they can almost always be easily sold for cash.   

Liquidity is comforting and the uncertainty associated with illiquidity can be stressful.  Immediate access to your hard-earned funds should something change or go wrong is naturally preferable to the alternative.

This peace-of-mind has a cost, however, as liquid assets tend to be bid-up so much that they command a premium relative to their illiquid counterparts.

Some very famous professional investors have built portfolios and careers on the notion that liquid assets have higher returns than liquid assets.

The Chief Investment Officer of Yale University, David Swensen, pioneered this approach towards liquidity while managing Yale’s endowment.

While managing a multi-billion dollar endowment and saving / investing for retirement are vastly different in terms of objectives, the fact remains that there is a case to be made for less liquid asset classes.

Retail investors who are investing for or during retirement absolutely need to keep a portion of their money in liquid assets.  Emergencies, unexpected living expenses and potential health expenses require adequate resources that are readily available.

That said, it may pay to be open to the possibility of less liquid asset or product classes with the funds that are not earmarked for near-term expenses and emergencies.