Investment strategy What are liquid assets? A helpful guide

Liquid assets can be easily used for immediate needs. But distinguishing liquid assets from illiquid assets is tricky for some.¹

People often own a variety of assets, such as the stocks in their brokerage accounts, the homes they live in, the businesses they started and anything rare or valuable – like a piece of art or a family heirloom. These assets are considered more or less liquid, based on how easily they can be converted into cash.

If you want an answer to the fundamental question of what are liquid assets, explore the guide below.

Liquid asset definition

An asset is considered “liquid” if you can sell it easily (or “liquidate” it).²

The most liquid asset is cash, either in a bank account or money market fund. Stocks are also considered to be a very liquid asset, though it might take a few days for your stock sale to settle and to get the money from your account.

Liquid vs. non-liquid assets

In contrast to liquid assets, an illiquid or non-liquid asset is one you can’t sell easily in the short term.

Real estate, works of art and antiques can be difficult to sell for many reasons: Often, it’s not easy to find a buyer, the asset is very expensive or the process of selling the asset can take a long time.

Businesses also have illiquid assets, like buildings, machinery or inventory that can’t be sold for a profit within a year. For example, a distillery business that sells 12-year-old bourbon may have barrels that have only aged 10 years. This inventory is considered an illiquid asset – even though bourbon is literally liquid.

Liquid asset examples

The key feature of a liquid asset is the ability to convert the asset into spendable funds quickly. Here’s a look at some liquid asset examples:³

• Cash: Physical cash in your wallet is arguably the most liquid form of funds because you can use it to make a purchase immediately.
• Savings accounts: Money stored in your savings account is a cash equivalent because it’s easy to access immediately.
• Checking accounts: Cash stored in your checking account is straightforward to access.
• Certificates of deposit (CDs): Although you’ll likely pay an early withdrawal penalty to access your funds early, most consider CDs to be a liquid form of funds.
• Money market accounts: This specialized savings account stores funds that you can spend almost immediately.
• Stocks: If you have money invested through a taxable brokerage account, you can quickly sell those assets to access spendable cash.
• Treasury bills: T-bills issued by the U.S. government can be liquidated before the maturity date, which makes them a liquid asset.

Illiquid asset examples

Many investors also have illiquid assets in their portfolios. Here are a few examples of illiquid assets:⁴

• Real estate: A common illiquid asset that most people own is their home. While you can access the equity by selling the home or borrowing against its value, the process is a lengthy one. This makes real estate an illiquid asset.
• Some types of bonds: Some bonds are considered illiquid because they have long maturity dates, and it may take years to make money off of those types of bonds.
• Gold and other precious metals: Although you can sell precious metals, the process typically takes longer than selling off stocks from your portfolio and your sale time may be dependent on having the asset authenticated and appraised before it can be sold.
• Fine art: Finding the right buyer for a fine art piece can take time. It may also require working with a specialized broker or auction house, which means artwork falls into the illiquid asset category.
• Jewelry: High-end jewelry can hold value. But when selling these pieces, it can take time to find a buyer willing to pay the price you have in mind. In addition, buyers may require that the authenticity and value of the jewelry be independently appraised.

How to balance liquid and illiquid assets

Individual investors usually have liquid and illiquid assets in the form of bank accounts, brokerage accounts and real estate.

High-net-worth investors may have a lot of underutilized capital that could benefit from being put into more illiquid investments. Although these individuals may find aesthetic satisfaction from very expensive works of art, bottles of wine or vacation houses, other options can include investments in a hedge fund or private equity fund. Either way, they should consider talking to a financial advisor before taking the plunge.

For the average investor, long-term investing may be one of the most effective ways to build wealth and achieve financial goals. This can include contributing to a diversified portfolio in the markets or exploring opportunities like real estate or small business ventures. By staying committed to a long-term strategy, investors can better navigate market fluctuations and position themselves for growth over time.

It is possible to get more liquid exposure to illiquid assets through investment vehicles like real estate investment trusts (REITs) and exchange-traded funds (ETFs). The argument is that you get some of the protection from volatility offered by an illiquid asset, but the asset you own is, in fact, very liquid.

Some critics argue that ETFs whose underlying assets are illiquid may suffer from a liquidity crunch in moments of market crisis. Proponents of ETFs that allow investment in illiquid assets argue that the price-discovery mechanism in ETFs can allow them to be more capable of handling movements in illiquid investments.

For most investors, it's probably best not to consider investing in many illiquid assets until they've put aside enough liquid assets or savings to deal with a financial emergency and other goals.

Liquid vs. illiquid assets: Risks to consider

Every kind of asset you buy comes with defined risks, and risk is the price you pay for the investment’s reward.

Stocks are subject to equity risk, meaning their value can go down to zero. Bonds are subject to interest rate, credit and counterparty risks – you can lose your money if the bond issuer defaults or if inflation eats away at your profit.

Other illiquid assets are a risk for the reasons cited above: You can’t get your money out quickly and possibly for a long time, but the value in holding such assets lies in their potential for appreciation. Theoretically, because illiquid assets are harder to sell, their price tends to not fluctuate as much or as often as liquid assets.

The bottom line

Like with any investment choice, choosing whether to invest in liquid or illiquid assets is a matter of weighing what your goals are against the risk of the investment. It will have implications for your investment whether it is liquid or illiquid and it is worth the effort to determine what bucket any investment you’re considering falls into as you make any investment choices.