What we seek most, but don’t always require

In theory, liquidity is often defined in transactional terms: the ability to convert an asset into cash quickly, at or near fair value. But in portfolio construction and behavioural finance, liquidity is far more complex. It is not simply a structural feature; it is a psychological comfort, a source of optionality, a latent cost and crucially, a strategic decision.

Most individuals gravitate towards liquidity almost reflexively. The assurance that one’s capital is always within reach fosters a sense of control, or at least, the appearance of it. But this immediacy comes at a price. Liquid instruments typically exhibit lower yields, precisely because the flexibility they offer is already priced in. They are also subject to continuous market repricing, which introduces not only volatility but behavioural risk. The investor’s challenge often isn’t volatility itself but also how they respond to it.

We return to Jana and David, two fictional profiles introduced in our previous piece, to illustrate how liquidity decisions play out in practice.

Jana once equated liquidity with prudence. Her portfolio was composed of money market funds, daily priced unit trusts, and listed equities, assets that offered transparency and mobility. But over time, this access became a liability. Real-time mark-to-market valuations created persistent tension. In drawdowns, she moved to cash. When the market recovered, her capital was still watching from the sidelines.

David took a more intentional approach. He didn’t reject liquidity, but he segmented it. His portfolio held layers of access, liquid assets for known near-term needs, semi-liquid positions for opportunistic rebalancing, and illiquid strategies for long-duration goals. He wasn’t chasing yield for its own sake. Rather, he was aligning access to purpose. The result was a portfolio less exposed to market noise and better tuned to his actual life, not just his tolerance for movement.

Ultimately, liquidity is a trade-off and must be weighed in the context of purpose, time horizon, and emotional discipline. Like leverage or duration, it can amplify outcomes, both good and bad. The investor’s task is not simply to maximise access, but to understand when, and why, it is truly needed, and to design around that answer with intention.

At the heart of every portfolio lies a tension, the need for access versus the pursuit of return. Liquidity fulfils the former: it provides comfort, optionality, and the assurance that capital is just a click away. But this assurance carries a hidden cost.

Liquidity is rarely free. Its price is embedded in forgone yield, constrained investment scope, and the behavioural noise it invites. Liquid instruments, whether money market funds, listed equities, or daily dealing unit trusts, tend to yield less, not because they are less risky, but because the freedom to exit at will is already priced in. The market charges for convenience.

Illiquid assets, by contrast, offer something different. In exchange for time, they offer premium, not speculative upside, but compensation for patience. This illiquidity premium exists because capital is tied, reducing the risk of sudden outflows and enabling strategies not viable in daily priced markets. It is friction, turned into structure. Constraint, used as discipline.

Yet despite this, many portfolios are designed backwards, defaulting to liquidity rather than questioning its necessity.

More intentional allocators think differently. They begin with purpose, not product. Liquidity is matched to the task it must perform. Short-term obligations are backed by accessible assets. Long-term capital is deployed into structures where noise is filtered, terms are aligned, and value accrues through time, not timing.

This is more than asset-liability matching. It is behavioural design. By placing friction between the individual and their capital, portfolios become less vulnerable to impulse, matched to goals, and more resilient in periods of stress.

But right-sizing liquidity is delicate. Too little, and individuals may be forced to unwind assets in adverse conditions, realising losses, interrupting compounding, and triggering tax events. Too much, and they invite silent erosion, returns diluted by overtrading, by low yields, and by psychological toll.

Ultimately, liquidity is not an absolute virtue. It is a tool, to be used precisely, not excessively. The goal is not to hold as much as possible, but as much as necessary. Enough to meet known needs, absorb the unexpected, and still let patient capital pursue what only time can earn.

Liquidity reveals its value only in context. It’s neither inherently good nor bad, only useful when aligned to purpose.

One way liquidity has been conceptualised in portfolio thinking is through segmentation by time horizon and function. While not intended as guidance or recommendation, this structure has been observed as a useful lens for understanding how different types of access might align with different needs:

• Short-term liquidity (0–12 months): This capital exists to meet immediate obligations, cash flow needs, unexpected events, and known expenses. It is typically held in cash or near-cash instruments, where safety and access take precedence over return.
• Medium-term liquidity (1–3 years): This layer supports planned goals on the horizon, a property purchase, education, or career transition. It allows for modest yield while maintaining some degree of flexibility, balancing return potential with access.
• Long-term capital (3–10+ years): This is the portion that can tolerate illiquidity in pursuit of higher yields, contractual protections, or asset-backed exposure. Here, capital is positioned to earn the illiquidity premium, to benefit from compounding without interruption, and to align with the fundamental economics of the underlying assets.

This structure does more than allocate risk, it reinforces stability. Individuals with clearly defined liquidity tiers are far less likely to panic in downturns. Their near-term needs are covered, allowing long-term positions to remain untouched and uninterrupted.

No portfolio is set out to underperform. And yet performance is often eroded not by the lack of strategy or skill, but by a misalignment of capital and intent. Liquidity held in excess, dilutes returns and invites overreaction, often avoidable. Held too tightly, it undermines resilience.

The solution isn’t more liquidity or less. It’s precision: structuring access to match purpose and in doing so, you’re able to unlock what many overlook: the illiquidity premium.

This is not a speculative windfall. It’s a structural reward for investors who commit with intent. Illiquidity, when paired with the right asset, the right timeline, and the right protections, becomes a design feature, a source of yield, discipline, and stability.

This is the core of what BC Funding Solutions (“BCFS”) delivers.

As South Africa’s market leader in community scheme lending, BCFS has facilitated over R2 billion in loans to bodies corporate and homeowners’ associations. These are not abstract exposures. They are loans tied directly to tangible, legally secured residential properties.

What sets BCFS apart is not only its scale or track record, but its ability to attract both institutional and retail capital. The liquidity trade-off that might dissuade short-term capital instead serves as a signal of conviction, a mark of discernment for those who understand that, in the right structure, it can be a powerful source of return and resilience.

The result is a suite of solutions provided by BCFS that embody the illiquidity premium, not just in return terms, but in portfolio behaviour, alignment, and purpose.

The question, then, is not whether liquidity is good or bad but rather “how much liquidity do I truly need and what might I gain by letting some of it go?”