Liquidity -- how quickly, easily, and efficienly you can sell your assets to raise cash or reinvest -- is an attractive quality for many investors. It's a safety blanket, like having a lot of cash in the bank or a healthy income stream. But liquidity comes at a cost, and being too liquid could be an expensive mistake.

As Matt explains, liquid investments present a few important behavioral risks that are often overlooked. When the market is turbulent, it's tempting for investors to sell their investments and retreat to cash, so to speak, but cash has it's own problems. Firstly, cash loses value over time to inflation, and this loss of purchasing power can be significant over the long run. Then there's what happens (or doesn't happen) after an investor moves to cash -- how long does it take them to redeploy it, and at what price? Many bad investments are made after "waiting out" bad markets, because investors wait too long to re-invest out of fear and end up paying higher prices. On top of that, they lose the effect of compounding they would have had by staying invested.

The temptation to time the market and precisely move in and out of investments to maximize returns and minimize losses is high, and many investors fall prey to it. Liquidity offers the allure of safety, and while liquid investments are useful and provide a portfolio with options, they also carry risks that should not be ignored.

Follow Matt Murphy

Web: https://www.benetaswealth.com

Newsletter: http://eepurl.com/jb7SNc

LinkedIn: https://www.linkedin.com/in/mattmurphycfp

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.

All indices are unmanaged and investors cannot invest directly into an index.

Investments in target-date funds are subject to the risks of their underlying holdings. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative investments based on its respective target date. The performance of an investment in a target-date fund is not guaranteed at any time, including on or after the target date. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Exchange-traded funds (ETFs) are subject to market volatility, including the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.

The Hidden Risks of Chasing Liquidity