Liquidity-averse
Liquidity-averse describes an investor, company, or individual who prefers to hold assets that can be readily converted into cash with minimal loss of value. This preference stems from a desire to maintain financial flexibility, meet unexpected obligations, or capitalize on short-term investment opportunities. This aversion to illiquid assets often leads to a willingness to accept lower returns on more liquid investments like cash, government bonds, or easily tradable stocks. The level of liquidity aversion varies depending on individual risk tolerance, market conditions, and perceived needs.
Liquidity-averse meaning with examples
- A liquidity-averse retiree might prefer to keep a large portion of their savings in a high-yield savings account, even if it means forgoing higher returns in the stock market. The peace of mind knowing they can access their funds quickly to cover medical expenses is prioritized over potential gains.
- During an economic downturn, liquidity-averse investors often sell off illiquid assets like real estate or private equity to bolster their cash reserves. They prioritize having immediate access to funds over holding onto assets that might be difficult to sell quickly at a fair price.
- A small business owner might be liquidity-averse, keeping a significant cash buffer to weather unexpected expenses or short-term fluctuations in cash flow. This strategy prioritizes the survival of the business over maximizing potential investment returns.
- Institutional investors such as pension funds can be considered liquidity averse and therefore will not hold many high-risk, volatile or small-cap shares. Instead, they will hold a large percentage of cash or government bonds.
- Following a market crash, market participants often become more liquidity averse, moving towards highly liquid assets as uncertainty prevails, even if returns on such assets are diminished.
