Why Liquidity Matters: The Hidden Costs of illiquid Investments

Investing always comes with a balance of risks and rewards, and one factor that often gets overlooked in the excitement of potential returns is liquidity. Liquidity refers to how easily an asset can be converted into cash without significantly affecting its value. But why does this matter, and what are the real costs of illiquid investments? Let’s break it down in a simple way.

The Appeal of Illiquid Investments

Sure, illiquid investments can seem pretty attractive. They often come with promises of higher returns because you’re locking up your money for a longer period. Real estate, private equity, and even certain types of debt funds like trust deeds often fall into this category. These investments tend to appreciate over time and offer rewards for the patient investor.

But, hold up—let’s talk about what you’re trading off here: flexibility. In a world where things can change at the drop of a hat (hello, 2020!), not being able to access your money when you need it can be a real headache.

Why Liquidity Matters

Liquidity isn’t just about getting quick access to cash. It’s about being able to pivot when needed, whether it’s moving money to better-performing investments or handling an unexpected life event. Illiquid assets can tie you down, potentially costing you more than you bargained for.

Hidden Cost #1: Limited Financial Flexibility

Let’s say you’ve got your funds tied up in an illiquid asset like real estate or private equity. If a golden opportunity arises—maybe a stock is hitting a record low or a promising startup is asking for seed money—you’re stuck. Your cash is locked up, and you can’t act fast enough. The opportunity cost of not being able to move quickly can be significant.

With liquid assets, like stocks or bonds, you have the option to adapt your portfolio in real time. You can sell off or rebalance your investments quickly without a hassle.

Hidden Cost #2: Fire Sale Prices

Need to sell your illiquid investment in a pinch? Be prepared to accept less than what it’s worth. When there’s no steady market to trade in, you don’t get to dictate the terms as easily. Instead, you’re often at the mercy of whatever buyers are willing to pay at that moment. This is particularly true for real estate or private investments, where buyers are fewer, and they know you’re eager to sell.

Trust deeds, however, offer a bit of balance. While they are illiquid in nature, they provide predictable income—making them easier to ride out for the long term, even if you can’t quickly cash out.

Hidden Cost #3: Stress and Uncertainty

Illiquid investments often come with a side dish of uncertainty. Sure, the numbers may look great on paper, but until you actually liquidate, you don’t know what you’ll end up with. That uncertainty can lead to stress, especially if the investment market changes or you need that money sooner than you thought.

Liquidity takes away a lot of that stress. You know you can access your funds without worry or penalty when needed. It’s peace of mind. With investments like LBC Capital Income Fund, LLC’s trust deeds, you get regular income distributions, reducing the stress of waiting for a future payday.

The Middle Ground: Semi-Liquid Investments

There’s a sweet spot in the investment world: semi-liquid assets. These investments allow you to enjoy steady returns, but they also offer periodic access to your funds. Think about trust deeds. They’re not as illiquid as real estate or private equity, but they’re also not as fluid as stocks. They sit somewhere in the middle—offering predictable returns and some flexibility.

For instance, at LBC Capital Income Fund, LLC, we provide our investors with regular monthly distributions or the option to reinvest those earnings. It’s a balance of earning a higher return without completely sacrificing liquidity.

So, What’s the Play?

If you’re considering long-term, illiquid investments, ask yourself a few questions:

• Can I afford to not touch this money for 5, 10, or 20 years?
• Do I have a reliable income stream from other, more liquid assets?
• Am I comfortable with the idea of being stuck in an investment I can’t sell quickly?

Remember, liquidity offers options, and options are what give you flexibility in an unpredictable world. By keeping at least part of your portfolio in liquid or semi-liquid assets like trust deeds, you can maintain financial flexibility while still enjoying solid returns.

A Final Thought

Illiquid investments have their place, but they shouldn’t be your entire portfolio. A balanced mix, with a focus on liquidity for short-term flexibility and illiquidity for long-term growth, can help you ride the waves of market changes and economic uncertainty.

At LBC Capital Income Fund, LLC, we offer the best of both worlds—solid, real estate-backed trust deeds that deliver predictable returns while giving you the confidence that your investment is working for you. Looking for steady growth without the stress of illiquidity? Let’s chat.