What is liquidity? 

The liquidity of an investment refers to how quickly or easily you can cash out the asset and have the money in your bank.  

The amount of liquidity of your investment portfolio is decided by the type of assets you have. For example, if you hold a lot of cash and traditional funds, your assets are typically highly liquid. But, if you have assets like property or private investments, that liquidity will decrease, because you may be required to hold those assets for a certain amount of time, or they could be hard to sell.

How do investment returns relate to liquidity?  

There isn’t necessarily a relationship between how much your investment will grow and how liquid it is.

For example, you can purchase a fund with a relatively high level of liquidity which tracks the S&P 500. Since 1957, the index has had an average return of 10.33% each year, although past performance doesn’t guarantee future gains.  

If you’re invested in a typical open-ended fund invested in shares, you can usually ask to withdraw your money and the instruction will be processed in just a few days.

Other assets, like private equity or private credit, have more complex liquidity agreements. For example, you may only have a certain window to withdraw your investments every few months. While this may be suitable for some investors, it’s important to understand if it works with your investment plan.  

Why is liquidity important?

The importance of liquidity is highly based on your investment goals. If you plan to leave your investments in the market for a long time and know you won’t need access to it in the short term, then liquidity may not be as important to you.  

But, if you might need access to your money sooner, then choosing a more liquid investment can make the process easier. It can also be helpful if you plan to make changes to your portfolio along the way and would like the ability to move money around.  

If you don’t want to worry about balancing the levels of liquidity in different investments, you can also invest through a multi-asset fund. These funds provide diversification by bundling many different asset classes, like bonds, equity, cash and alternatives, in just one fund. Then, investment experts manage those portfolios. AJ Bell’s in-house multi-asset funds, for example, come with a range of risk and income options.

Learn more about portfolio diversification

How liquid are stocks?  

Because liquidity is a measure of how quickly something will sell in a marketplace, the liquidity of a stock is dependent on what sort of stock you hold. If you hold something that is in high demand, such as shares in Nvidia or Microsoft, those will typically sell extremely quickly and are therefore very liquid.  

If you hold something more niche, such as a smaller company within emerging markets that has fewer buyers, your investment may be more illiquid. Generally, stocks in popular indices like the S&P 500 and FTSE 100 will have high levels of liquidity.

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