Portfolio liquidity risk: how long an exit would take

Portfolios are judged by value and return. The third parameter — how quickly they can be turned into money — is usually not measured at all.

How to calculate it

Divide each position's size by its average daily turnover. The result is the number of days it would take to close the position without occupying a noticeable share of the market.

A position requiring many days will be sold at a concession if an urgent exit becomes necessary.

Why this is not abstract

The need for money arrives suddenly and often coincides with a poor market — A reserve outside the market: why it matters more than picking securities.

Where the risk concentrates

In third-tier securities — Blue chips and market tiers: how groups of securities differ. In narrow funds: a fund is no more liquid than its contents — What is actually inside a fund. In over-the-counter assets — The over-the-counter market: trades without an order book.

How to manage it

Cap the share of illiquid positions so the liquid part covers any foreseeable need.

Keep a reserve in an instrument with instant access — Money market funds: where cash waits between decisions.

Do not increase an illiquid position because it is "undervalued": the illiquidity discount is payment for a service that is absent, not a market error — Liquidity: noticed only once it runs out.