David Thomson: The importance of liquidity
LIQUIDITY RISK is now front-of-mind for advisers and clients following the high-profile suspension of the Woodford fund, where holders are now locked in for an unknown time.
A key part of any investment process should be the consideration of liquidity. While volatility, and correlation are typically given due consideration we often find liquidity is ignored.
Perhaps because it is harder to measure but it can prove the most important risk of all. Also, there is a truism in investment that liquidity is there except when you most need it.
I first experienced this during 9/11 when markets were literally like rabbits frozen in the headlights. You couldn’t buy or sell; normal liquidity had simply evaporated.