Many people think that an important benefit of investing in the public equities market is that they can withdraw or liquidate the investments at short notice.
While investing, the liquidity in equity markets should at best be viewed by the long-term investor as a marginal benefit. It’s not a good primary reason to invest in the stock market. If liquidity is a priority, we should keep our money in a bank account or fixed deposit.
On the whole, one reason people feel (probably correctly) that they do better with real estate investments is because property is illiquid. It can take six months to buy or sell a real estate asset. This illiquidity encourages inertia, which is good for informed investors. If you buy the right thing, the best next step is to sit tight and do nothing.
There are two factors at play when it comes to buying and selling equity investments, both related to the fact that the market offers excessive liquidity. The first is that if there are too many options available to do something, people tend to forget that there exists one additional option, which is to do nothing. The market offers us an option to buy or sell every second. For a multi-year investor, that’s too many options. The market’s excessive liquidity fuels highly visible volatility, which drives a second factor – the double-edged human trait of greed and fear. Wildly fluctuating prices are constantly needling the investor to be one or the other – afraid or greedy. It would be better for the average long-term investor if stock prices were more opaque, like property prices.
Since they are not, we have to artificially constrain our actions. Once we have done the work of selecting the right equity investment – it could be our own stock picks, an index fund, or an active fund manager – we need to be disciplined and not touch it for a long time, even though the ticker, business news outlets and our friendly and well-meaning broker are all nudging us in the opposite direction.