For investors, understanding what illiquid assets are and how they can impact investment performance is important. Assets can be categorized as liquid or illiquid based on how quickly they can be converted into cash. Liquid assets, like money market accounts, Treasury bonds and stock, can be converted into cash quickly, with minimal impact on their value.

Liquid assets are highly desirable for investors because they can be quickly liquidated, or converted into cash, when needed without suffering large losses in value. On the other hand, illiquid assets, such as real estate, art, collectibles and private business equity, often take a long time to convert into cash and are subject to high transaction costs and their value may fluctuate significantly during the conversion process.

Investors need to be aware that certain assets are illiquid, which means they can be difficult to move into and out of a portfolio if needed quickly. Illiquid investments tend to be high risk because there is no guarantee the investor will be able to convert it into cash quickly, or sell it at the current price. Without being able to easily move out of an asset, investors are stuck in that investment, regardless of what market conditions may bring. Additionally, these types of investments tend to show higher levels of price volatility, or intense short term fluctuations in price, because the supply of buyers may not be able to sustain heavy selling.

The long-term nature of illiquid investments means that the return may be significantly different than what was expected or advertised when the investment was first purchased. The ultimate performance of an illiquid investment is not based on current market conditions but on the asset's ability to be sold quickly and at a fair price, both of which can be difficult and time consuming. In markets with a drop in demand, investors may be faced with discounted offers for their illiquid assets if the buyers are more interested in preserving their capital and not trying to make risky investments.

For all types of investments it's important for investors to understand the risks associated with that asset, calculate their current level of liquidity, and be aware of their own needs for liquidity. Knowing when there is a need to convert an asset into cash quickly, and the types of assets that can provide that liquidity, is crucial for managing investment returns and reducing risk.