In the world of investing, everyone loves the idea of high returns but few are truly prepared for what it takes to earn them. This disconnect between what investors think they’re comfortable with (risk appetite) and what they can actually handle (risk reality) becomes glaringly obvious when it comes to illiquid assets.
Unlisted shares, real estate, private equity, collectibles, and other alternative assets are all part of the illiquid universe. These assets don’t offer instant buying or selling options and that’s where things get interesting.
So how do you assess whether your risk appetite aligns with reality when investing in illiquid opportunities? Let’s break it down.
Understanding Illiquidity
Illiquid assets are investments that cannot be quickly converted into cash without a potential loss in value. Unlike more liquid instruments, these assets usually require longer holding periods and don’t have active daily markets.
For example:
- An investor in unlisted shares may need to hold their investment for several years before an exit opportunity arises.
- A stake in a private company can’t be sold overnight; it may require a buyer, a valuation process, and legal clearances.
Illiquidity doesn’t make an asset bad in fact, many of the most rewarding investments in history have been illiquid. But it does require a specific mindset.
The Illusion of Risk Tolerance
Many investors say they have a “high risk appetite” when markets are doing well or when they hear success stories of multi-bagger returns in private markets. But risk on paper is very different from risk in action.
Here’s how the gap often shows up:
- You invest in a private company, expecting to double your money in 3 years.
- Two years in, the company is growing, but there’s no clear exit.
- An unexpected expense arises in your personal life and you can’t liquidate this investment quickly.
At this point, your risk reality kicks in. If your liquidity needs or emotional tolerance don’t match your investment’s nature, it creates stress and often leads to poor decisions.
Bridging the Gap Between Appetite and Reality
1. Know Your True Liquidity Needs
Before investing in illiquid assets, ask yourself:
- Can I afford to lock away this money for 3–7 years?
- Do I have an emergency fund and liquid assets for near-term goals?
If the answer is no, illiquid assets should be a smaller portion of your portfolio.
2. Understand the Holding Period
Illiquid assets usually come with an uncertain timeline for returns. For example, unlisted shares may depend on the company’s growth or future acquisition plans. Be prepared to wait and benefit from the patience premium.
3. Diversify Within the Illiquid Space
Don’t put all your eggs in one basket. If you’re allocating 15% of your portfolio to illiquid assets, spread it across different instruments such as unlisted shares, private debt, or REITs. This reduces risk concentration.
4. Stay Informed and Mentally Prepared
Illiquid assets don’t come with daily updates, but that doesn’t mean you should ignore them. Track their performance annually, read company updates, and stay mentally aligned with your original investment thesis.
5. Partner with Credible Platforms
Working with trusted platforms like InCred Money ensures you’re not only investing in high-potential opportunities but also getting full transparency on risk, timelines, and valuations.
Final Thoughts
Your risk appetite might say you’re ready for the rewards of illiquid investing. But your risk reality your true financial needs, emotions, and patience should lead the way.
There’s no harm in dreaming big with your investments, but the best returns often go to those who align their expectations with reality. When you’re truly prepared, illiquid assets like unlisted shares can become powerful tools for long-term wealth creation.
Explore exclusive access to high-quality unlisted opportunities with InCred Money.
Source: The Ins and Outs of Investing in Illiquid Assets – CAIA Association
