How Do I Choose the Best Illiquid Assets?

Choosing the best illiquid assets is difficult, even for the highly-educated investor. Since these assets cannot be easily sold for cash, a long-term mindset when choosing is essential. The value of these investments can also be hard to determine, making a sense of intuition and willingness to take large risks important. Prominent examples of illiquid assets include property, rare antiques, hedge funds, and low-volume stocks and bonds, which often have fewer amounts of buyers than available product.

When choosing illiquid assets, investors should try to round out their overall portfolios. Depending upon a return from such an investment is not an astute move, since it may be many years before it will be resold. The present and future values of illiquid assets are often difficult to determine. For example, a suitable buyer for an antique coin collection may take 30 years or a few weeks to find.

Even if a suitable buyer is located, the value he is willing to pay is unpredictable and subjective. If an antique carries some sort of sentimental value and it is very rare, the buyer may be willing to pay a very high price. Another buyer may not be willing to pay a high price, particularly if he needs to resell the good and recoup some of his investment.

It is important to choose illiquid assets that will not dominate an investment portfolio or overshadow more liquid investments, such as government securities. For example, if an investor's goal is to achieve a moderate to high return within 30 years, it may be appropriate to choose a few real estate investments. An investor who needs a high return within a shorter amount of time may need to eliminate illiquid assets completely. Liquid assets should complement and dominate the portfolio, particularly in times of market volatility.

Since the purchase of an illiquid asset can be intuitive or decided on a subconscious level, the resolve to not overanalyze can be beneficial. While an investor should have some data to back up the value of the asset, he should also choose those investments he believes will be worthwhile and serve his long-term objectives. Typically, those who choose tangible illiquid assets are often seeking to improve them gradually over time before selling.