Liquidity

Cash is perfectly liquid. Listed shares are highly liquid. A rental property takes months. A stake in a private company can be effectively impossible to sell at any sensible price.

Illiquid assets often return more precisely because they are inconvenient. The danger is needing money at the exact moment your wealth is locked in something that takes six months to sell.

The cost of needing money quickly is measurable. A property that would fetch $500,000 over four months might fetch $440,000 in three weeks - and that 10 to 15% discount is charged precisely when something has already gone wrong, which is why forced sales cluster in bad years. Illiquidity is not a risk you notice until it is the only one that matters.

The rule that follows is about matching, not avoiding: hold three to six months of costs in something perfectly liquid, then match each asset's liquidity to the horizon of the money in it. Money needed within two years does not belong in anything that can fall 30% and stay there for three.