The Debate on Liquidity and Investment Productivity

Liquidity is often seen as a desirable feature in investing, providing flexibility and access to capital when needed. However, some argue that less liquid investments—such as private equity, infrastructure, and real estate—are more productive because they force long-term thinking.

But is this really true? This article explores whether lower liquidity leads to better investment outcomes.

The Arguments in Favor of Illiquid Investments

1. Encouraging Long-Term Decision Making

• Illiquid assets cannot be sold quickly, preventing panic-driven decisions.
• Investors are forced to think long-term, which can lead to higher returns over time.

2. Capturing Additional Return Premiums

• Many private market investments have historically outperformed public markets.
• Investors in venture capital, private equity, and property often see higher returns due to illiquidity premiums.

3. Insulation from Market Volatility

• Because these assets are not marked to market daily, they appear less volatile.
• This reduces behavioral mistakes, as investors are less likely to react to short-term price swings.