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Salemicus comments on Financial Effectiveness Repository - Less Wrong
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Comments (62)
This is not investment advice and should not be relied on as such.
The more liquid your investment, the better. If you have a theoretically valuable investment, but in an area where finding a buyer is very hard, you may find yourself either 1) forced to sell at a knock-down price, or 2) unable to exit the investment at a time of your own choosing. Therefore (ceteris paribus) you should demand a higher expected rate of return on illiquid investments.
Most liquid to least liquid:
This probably applies mostly when you do not have enough liquid assets to winter times that might force you to sell.
That's one way it can come up, but it's a more general issue. Suppose a different, better investment opportunity presents itself - you will only be able to take it if your existing investments are liquid. Or suppose your tax circumstances change. Or any manner of things.
Liquid investments only need to be the best investment right now to be worth taking. Illiquid investments also need to be better than hypothetical investments you might get over the term of he investment, and they need to remain worthwhile across a variety of circumstances. That is a much higher threshold.
Agreed. This is a nice qualification for the advice to focus on liquid assets.
Why are home-country government bonds more liquid than stocks? Publically traded stocks can be sold quite fast.
Trading shares on an exchange sometimes gets suspended, for example if the company is in financial difficulties.
The difference in liquidity there exists for institutional investors - it's faster and easier to sell a billion dollars of T-bills than a billion dollars of Amazon. For a retail investor with maybe a thousand bucks in a single position, the difference is irrelevant.
I think this topic is rather about retail investing than about how to be an institutional investor.
Exactly my point. It's a distinction that exists in the literature, but it's not relevant here.