Do you remember what you were doing in December 2018?
I sure do.
The stock market was experiencing one of its roughest months in years. The S&P 500 was down nearly 20% from its peak in October, and it felt like the bottom was falling out.
Several times daily, I found myself on my laptop, obsessively checking my brokerage account balances. It seemed that each refresh showed numbers lower than before. My stomach tightened as I watched my “liquid” investments evaporate in real-time.
My finger often hovered over the “Sell” button, the voice in my head screaming that I needed to stop the bleeding before it got worse.
Sound familiar?
That experience at the end of 2018 taught me something profound about myself: regardless of my financial “book knowledge,” I'm quite unsuited to handle the volatility that comes with highly liquid investments.
And after watching my net worth take a sizable hit, I started wondering if the liquidity I thought was so valuable was actually costing me money.
The Liquidity Tax (You Don't Know You're Paying)
Conventional financial wisdom champions liquidity. Financial advisors, mainstream media, and Uncle Bob at Thanksgiving all celebrate how quickly you can convert stocks and ETFs to cash.
”You can sell it instantly if you need to!” they proclaim.
And while that’s true, like most things in life, there's a trade-off. And it's a big one.
When you optimize for liquidity, you're paying what I call a “liquidity tax” in three major ways:
Lower returns: Liquid investments typically generate lower returns than their illiquid counterparts
Higher volatility: The easier something is to sell, the more it's subject to the market's emotional swings
Psychological pressure: The ability to sell at any moment creates constant decision fatigue
That last one is something most overlook. Every market dip becomes a decision point: ”Should I sell now? What if it drops more tomorrow? Maybe I should wait...but what if this is just the beginning of a crash?”
It’s exhausting.
Strategic Illiquidity: Feature, Not Bug
I've come to view the illiquidity of investments like real estate (and real estate syndications) as strategic illiquidity – it's a feature, not a bug.
The illiquidity does something powerful: it prevents making emotionally-driven decisions at the worst possible times.
With my (very small) stock portfolio, I'm still constantly tempted to react to every market movement. But with my illiquid real estate investments? I literally can't panic-sell, even if I wanted to.
And honestly? It's incredibly freeing.
Instead of worrying about whether to sell after every negative headline, I can focus on what actually matters – the fundamentals of the investment and the cash flow it produces.
Cash Flow Over Quick Cash
Most investors would be better served by shifting their mindset from “I need access to my entire net worth immediately” to “I need consistent cash flow.”
Think about it: when you sell an asset to access cash, you're breaking the power of compounding. You're not just taking the money out today – you're losing all the future growth that money would have generated.
Instead, owning cash-flowing assets gives you access to cash regularly without selling the golden goose. You preserve your compounding, avoid selling at potentially terrible times, and sidestep unnecessary capital gains taxes in the process.
Finding Your Balance
Now, I'm not suggesting you should throw all your money into illiquid investments.
The key is finding the right balance for YOU. This means:
Keeping a proper emergency fund in truly safe vehicles (think T-bills, not stocks)
Mapping your future cash needs against your investment timelines
Determining how much of your net worth truly should be liquid
Honestly assessing your psychological tolerance for volatility
For most investors who’ve never done this exercise, the answer is surprising. They don't actually need immediate access to their entire investable net worth, yet they're paying the liquidity tax on all of it.
The Bottom Line
Take a hard look at your portfolio and ask whether you're sacrificing returns for liquidity you don't actually need.
If you are, consider redirecting some of those funds to investments with “strategic illiquidity” that can provide consistent cash flow and likely higher returns.
Not only might you make more money, but you might also sleep better at night free from the constant burden of market-timing decisions.