What is liquidity risk?

Liquidity risk refers to the uncertainty of being able to sell an investment quickly without incurring a significant loss in its value. In financial markets, liquidity is crucial because it ensures that assets can be easily bought or sold without causing a drastic impact on their price. When liquidity is low, an investor may need to accept a loss if they need to sell an asset quickly, which can occur in various market conditions or due to the nature of the investment itself. For example, investments in real estate or certain types of bonds may not be easily liquidated compared to publicly traded stocks, leading to a higher liquidity risk.

Understanding liquidity risk is essential for investors to manage their portfolios effectively. It helps them assess how easily they can convert their investments into cash when needed and plan accordingly to avoid potential losses from having to sell assets in a hurry. This is particularly relevant in retirement planning and benefit management, where having access to funds in a timely manner is critical.