When investing, we typically focus first on returns, risks and market volatility. But there is another factor just as important as yield — liquidity in investments. It determines how quickly and easily you can access your money when unexpected changes occur in life or in the markets.

In this article, Kristiāns Purviņš, Head of the TWINO Investment Platform, explains what liquidity in investments means, how it affects access to your capital, and what an optimal investment portfolio structure looks like when viewed through the lens of liquidity.

What is investment liquidity?

Simply put, investment liquidity refers to how quickly you can convert your investment into cash without losing a significant portion of its value.

High liquidity means:

• Quick access to your funds,

• The ability to sell an investment at market price rapidly,

• Greater flexibility in financial decision-making.

Low liquidity, on the other hand, means that selling an investment may take time or require accepting a lower price.

For example, if all your capital is tied up in real estate or long-term funds with withdrawal restrictions, your portfolio may be valuable on paper — but your funds are not freely accessible.

Why does liquidity matter to investors?

1. Access to funds in unexpected situations

Life can present situations where money is needed quickly — unplanned expenses, illness, loss of income, reduced earnings, and so on. If most of your capital is invested in low-liquidity assets, you may find yourself in a situation where your money is effectively "frozen". Recovering it will take time, or you may be forced to accept a loss.

2. Flexible investing

Liquidity enables investors to be agile. When more attractive investment opportunities appear in the market, liquid assets allow you to react quickly and reallocate your portfolio.

This investment flexibility is especially important in dynamic market conditions.

3. Investment risk

Liquidity is also closely linked to investment risk. Less liquid investments often offer higher yield potential because the investor assumes the additional risk that funds will not be immediately accessible.

It is worth bearing in mind that investment liquidity can decrease rapidly during market crises:

• Equities may be difficult to sell at a "normal" price,

• Some funds may temporarily suspend withdrawals.

How does liquidity differ across investment types?

Liquidity can vary significantly depending on the type of asset.

Cash is the most liquid asset — it is available immediately and without restrictions.

Publicly traded equities and ETFs generally offer high liquidity, as they can be sold relatively quickly, although their price may fluctuate.

Bonds tend to have moderate liquidity — the ability to sell depends on market conditions and the specific instrument.

Real estate typically has low liquidity, as the sales process can be time-consuming.

Private investments are usually the least liquid — in such cases, capital may be inaccessible for several years.

Liquidity and investment term

One of the most important aspects of assessing liquidity is the investment term.

Short-term investments

If you plan to use your funds within the next 1–3 years, high liquidity is essential. In such cases, priority should be given to solutions where your money is readily accessible.

Fixed-term investments

For longer time horizons, fixed-term investments may be suitable. These often offer higher returns but restrict access to funds for a defined period.

How to choose the right level of liquidity?

There is no one-size-fits-all answer — everything depends on your financial situation, income stability and personal goals. However, several practical principles can help you make sound decisions.

1. Start with an emergency fund

Before investing, it is advisable to build up savings for unexpected situations covering at least 3–6 months of expenses.

Example:

• If your monthly expenses are €1,200, your emergency fund should be €3,600–€7,200,

• This money should be kept in a highly liquid form (in a current or savings account),

• It should not be placed in fixed-term or less liquid instruments.

This step helps you avoid having to exit investments at the worst possible moment.

2. Structure your portfolio by liquidity level

An effective approach is to structure your investment portfolio not only by asset type and risk level, but also by liquidity. In practice, this means three distinct "layers":

A. High Liquidity (for security and flexibility)

This portion consists of funds that must be accessible at any time:

• Emergency fund,

• Short-term investments,

• Funds earmarked for near-term planned expenses.

Recommended proportion: 10–30% of the total portfolio.

For example, if your total capital is €20,000, then €4,000–€6,000 should be held in highly liquid instruments.

B. Moderate Liquidity (for growth with flexibility)

This category includes investments that can be sold relatively quickly, but whose value may fluctuate:

• Exchange-traded financial instruments,

• A portion of structured investments,

• A portion of ABS investments with potential secondary market access.

Typical allocation: 40–60% of the portfolio.

From €20,000, this would mean keeping €8,000–€12,000 in this segment to maintain flexible investment capacity.

C. Low Liquidity (for higher yield potential)

These are investments with restricted access to capital, but often with higher return potential:

• Fixed-term investments,

• A portion of ABS securities with a defined term,

• Other long-term solutions.

Typical allocation: 10–30% of the portfolio.

From €20,000, approximately €2,000–€6,000 is recommended for long-term investments.

3. Align liquidity with your goals

The liquidity level of your investments should match when you plan to use the money:

• 0–2 years → high liquidity (accessibility is the priority),

• 3–7 years → a combination (partly highly liquid, partly fixed-term),

• 10+ years → you can afford a greater share of illiquid investments.

Example: If you plan to make a down payment on a property in two years, that sum should not be placed in fixed-term instruments without an early exit option.

Portfolio diversification by liquidity — a practical example

For an available sum of €15,000, a recommended portfolio structure would be:

• €4,500 (30%) — high liquidity (emergency fund and short-term needs),

• €7,500 (50%) — moderate liquidity (flexible investments),

• €3,000 (20%) — low liquidity (fixed-term investments, including ABS).

Liquidity in ABS securities

Asset-backed securities (ABS) are an investment instrument that pools multiple loans into a single financial product.

TWINO offers investments in ABS securities where the liquidity of your investment may vary depending on the structure of the specific product.

In practice, this means:

• We offer the option to choose fixed-term investments with pre-defined conditions and a clear term structure,

• In some cases, it is possible to use the secondary market to sell your investment before the end of the term,

• You can combine different terms, creating a so-called "laddering" strategy.

Example: Instead of investing €6,000 in a single 36-month instrument, from a liquidity perspective it would be more prudent to split it as follows:

• €2,000 for 12 months,

• €2,000 for 24 months,

• €2,000 for 36 months.

The result is more predictable availability of free capital and better liquidity control.

Common investment liquidity mistakes

Even experienced investors tend to underestimate the importance of liquidity and may fall into one of these typical traps.

1. Investing all capital in Illiquid Assets

In pursuit of higher returns, investors sometimes allocate too large a share of their funds to fixed-term or other less liquid investments.

As a result:

• Access to funds becomes restricted,

• Selling at a loss may become necessary,

• New opportunities in the market cannot be acted upon.

2. Insufficient emergency fund

Investing without a 3–6 month savings buffer is excessive risk and can lead to unpleasant consequences:

• Having to liquidate investments urgently,

• Financial stress in unexpected situations.

3. Choosing the wrong investment term

Committing funds to a fixed term that does not align with your personal goals can lead to a situation where capital is unavailable precisely when you need it, forcing you to seek alternative sources of financing.

4. Over-reliance on the secondary market

Some investments (including ABS) offer the possibility of selling before the end of the term, but this is not always guaranteed. It may not be possible to sell immediately, and the price may be lower than expected.

The recommendation: treat the secondary market as an additional option, not a guaranteed liquidity solution.

Investment liquidity: Final thoughts

Liquidity is an essential component of any investment strategy.

A well-chosen allocation of investments across liquidity levels helps maintain financial stability while taking advantage of growth opportunities — without sacrificing access to your capital.

TWINO offers investments in ABS securities with different terms, allowing investors to assess the balance between liquidity, term length and yield potential that best suits their individual needs.

For more information, visit the FAQ and tutorial sections on our website, or contact our specialists who will be happy to answer any questions.

Email: [email protected]

Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is informational and is not an individual investment recommendation.