risk
Liquidity Is A Hidden Position
The rule
A price you cannot actually sell at is not real wealth. And the ability to sell tends to vanish just when you are forced to.
Where it flips
Worrying too much about easy selling can push you into only the most-traded, crowded assets and out of sound long-term holdings that simply trade rarely. The fix is to match sellability to need - keep money you might grab in a hurry in truly easy-to-sell places, and let genuinely long-term money sit in slower holdings you will not be forced to dump.
The number on your screen is only wealth if a willing buyer will pay it when you want out. In a thin or panicked market the buyers step back, the gap between what sellers ask and buyers offer grows wide, and you either wait or take far less than the quoted price. So every holding has a second, hidden feature beyond its price: how easily you can turn it back into cash. And that feature is worst exactly when you most need the money.
A worked example
Arjun owns a small-cap share quoted at ₹500. When he tries to sell ₹3,00,000 worth during a slump, his own selling walks the price down to ₹430 before the order fills. A low-volume bond in his portfolio finds no buyer at all for days. [illustrative]
How to spot it
- ·You never checked daily traded volume before buying
- ·The buy-sell price gap widens sharply the moment markets fall
- ·Your emergency money is parked in something hard to sell fast
Roger Lowenstein · When Genius Failed