Liquidity versus Volatility – which is more important?


We find retirees are more concerned with preserving their capital than having the ability to convert their investments into cash

This article raises the issue of higher volatility typically associated with liquidity which may not suit all investors.

Just quickly – liquidity refers to the ability to convert your investment into cash.

For assets listed on the ASX liquidity can usually be achieved within 3 business days.

Some investors are happy to accept a lower investment return in order to have liquidity within their portfolio.

You may have heard of the ‘liquidity premium’ a reference to the higher rate of return to compensate investors for having their funds invested in illiquid funds like unlisted property.

Unlisted property investments are not as liquid and can take as long as 6 to 12 months or even longer to be converted into cash.

The liquidity premium can be evidenced when you compare the returns of listed property funds to unlisted property funds.

Generally, unlisted property funds provide a higher return when compared to listed property funds.

What about Volatility?

We believe that all assets should be priced based upon their risk and we agree that liquidity is an important factor to consider when considering risk.

However, we believe investors should also consider another measure of risk which is volatility.
Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable………for investors with a limited time horizon a loss of capital due to volatility can be risky……

Not being listed on the stock market means unlisted property funds are less volatile than funds or investments listed on the stock market such as shares or listed property funds.

In summary, 3 things we know about unlisted property when compared with listed property are:

  • Unlisted property will generally provide a higher overall return when compared to listed property
  • Unlisted property is less volatile when compared to listed property
  • Unlisted property is less liquid when compared to listed property

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