Liquidity is the ability to quickly convert assets into cash without negatively affecting their value. Your need for liquidity in an investment depends on the purpose and time frame for the investment. If the investment is part of an emergency fund or for something you plan on buying in the next month, the investment should have high liquidity. If the investment is part of your retirement and you’re 30 years old, your investment should be low in liquidity in order to realize a higher return. Regarding retirement funds, unless you plan on retiring at 35, assuming you’re young you most likely won’t require the funds for at least another 25 years.
There are different ways to look at liquidity. A house is typically considered a low liquidity investment because it can take months to sell a home. The stock market can also be considered low in liquidity circumstances. While a stock can be sold in seconds, the volatility of the stock market can make it difficult to quickly sell stock without realizing a loss. Potential loss must always be factored into liquidity.