Liquidity isn't the be-all-and-end-all of investment metrics. But it can be crucial to investors since it measures how easily they can convert their assets into hard cash if they need to.If you're suddenly and unexpectedly faced with financial obligationsand all of your wealth is tied up in non-liquid investments, you may effectively be poorer than if you had just put all of your money into a savings account and watched it slowly lose value due to inflation.
Even if you don't invest in risky financial products –unexpected medical bills, abroken-down carin desperate need of repairs, or aburst pipe in your homeare all financial obligations that may strike without warning. Keeping some of your money easily accessible for such cases is just common sense.
For example, imagine you're putting all of your money into real estate as a long-term retirement investment. Real estate is generally considered to provide reliable returns at minimal risk, but it's also highly illiquid. Now imagine you or one of your loved ones suddenly fell ill, and the medical bills start piling up. You usually won't be able to find a buyer for your property on short notice, but the rent you gain every month isn't enough to cover the bills either. Suddenly you find yourself in urgent need of cash and might be forced to take out a loan, even thoughyou could easily pay your bills if your money were in liquid assets.
This is also why personal net worth is a somewhat deceptive measure of a person's wealth since much of that net worth may be tied up in highly illiquid assets.
