The Comfort of Cash: What Liquidity Does for Your Mind and Money

I noticed this sign on my way to the gym the other day (I changed the phone number for privacy). I’ve seen plenty of these signs before, but this was the first time I really stopped to think about the business model behind them.

These signs target a very specific kind of homeowner: someone under pressure. It might be foreclosure risk, divorce, job loss, relocation, or major repairs they cannot afford. The common thread is distress and a willingness to accept a cash offer at a steep discount in exchange for immediate relief.

This is a textbook example of the liquidity gap: the difference between what you think your asset is worth and what you can realistically sell it for when you need cash quickly. Selling a house is rarely fast, smooth, or cheap; under pressure, people often trade price for speed.

What does this tell us?
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There is an entire industry built on profiting from the moments when people are in financial distress and lack the liquidity buffer to overcome their struggles. Need some evidence? Just ask the managers of Yale’s endowment fund. 

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​The Yale Case: A Wake-Up Call

Yale’s endowment has long been celebrated for its “Yale Model”. This model consists of lots of alternative investments (including private equity, venture capital, real estate, etc.) and less in traditional stocks & bonds. It performed exceptionally well for decades, outpacing the returns of many other endowment funds.¹

But even the greats can stumble. Recently, Yale negotiated to sell nearly $3 billion of its private equity portfolio via the secondary market (where the price is set entirely on supply and demand). This is essentially pawning illiquid assets at whatever price the market will bear.

Why would they do this?

Because they need the cash! Yale’s endowment returns have underperformed expectations lately, and they haven’t been meeting the school's spending needs.²

According to Yale Daily News, the school expects to transfer its PE stake at almost a 10% discount relative to what it believes the “paper” value is.³
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Even the mighty Yale is paying the hidden tax of an illiquidity crunch.


Real-World Examples Beyond Yale

Yale’s challenge is not unique. Liquidity issues show up everywhere:

• Homes & real estate: Just like private equity, selling a home takes time and involves friction (commissions, closing, possible price reductions). If you need to move quickly, you might take a big hit in price.

 

• Small business owners who have most of their wealth tied up in their business find that when they want to retire, pivot, or cope with adversity, they either need to sell (which can be difficult) or can’t sell.

 

• Retirement portfolios: Retirement accounts are designed for the long haul, not quick access. Withdrawing funds before a certain age usually triggers taxes and penalties. While there are exceptions and loan provisions, it is hard to call these accounts truly “liquid.”

Why Liquidity Matters for Peace of Mind

In recent years, there has been a push to give individual investors more access to illiquid assets such as private equity or private credit. These can have a place in a portfolio, but they come with restrictions. In many cases, you can only redeem once a quarter or even once a year. ⁴

That lack of flexibility is not just a portfolio risk. It is a psychological one.

Liquidity is more than cash in the bank. It is peace of mind. It is the confidence that if your car breaks down, a medical bill arrives, or an opportunity comes your way, you do not need to derail your long-term strategy to cover the short-term need. Without liquidity, every surprise expense can feel like a crisis. It leads to stress, bad decisions, and often long-term damage.

Liquidity is the pressure valve that keeps financial stress from boiling over and allows you to stay committed to your broader goals.

The Trade‐offs

Liquidity is valuable, but it comes at a reasonable cost:

• Lower returns: Highly liquid investments, such as cash or Treasury bills, typically offer lower income yields. Illiquid asset managers often sell higher expected returns to compensate investors for giving up flexibility and access to their capital.⁵

 

• Opportunity cost: Cash or highly liquid assets may underperform compared to higher-growth, less liquid investments.

 

• Management complexity: Deciding how much liquidity to hold is part art and part science. Too much becomes a drag on overall portfolio growth, too little becomes dangerous.

What You Can Do

Here are some practical steps to create a healthy balance of liquidity:

1. Map your liquidity needs. Identify near-term obligations and potential surprises. 
2. Classify your assets. Know which are liquid (cash, money market, publicly traded stocks), semi-liquid (bonds, some real estate), and illiquid (private equity, collectibles).
3. Maintain a liquidity buffer. Keep enough liquid assets to cover three to six months of expenses, or more if your income is volatile. 
4. Plan exposure to illiquid assets. Understand lock-up periods, be prepared for the possibility of selling at a discount, and stagger commitments to reduce concentration risk.
5. Stress-test your plan. Imagine needing cash in a downturn. What would you sell, and at what loss?

Lessons from Yale: Balancing Ambition & Prudence

Even though Yale stresses it’s not retreating from its alternative-heavy model, the act of selling a large chunk of its private equity assets is a striking reminder of something important: even the most sophisticated and well-resourced investors need liquidity.

That is a model of financial discipline worth emulating. Decide ahead of time what level of illiquidity is acceptable, build buffers in advance, and act before pressure becomes overwhelming.

Liquidity may not be as exciting as “high returns” or “private deals,” but it’s one of the pillars of financial stability. It’s what lets you navigate uncertainty and what gives you choices when others are forced into corners.

It’s not about avoiding illiquid investments altogether. It is about finding the right balance, so that when the need, opportunity, or crisis comes, you are mentally ready.
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​​More Reading:
Mental Accounting: Why the Same Dollar Never Feels the Same
The Subscription Trap: How Consumer Psychology is Quietly Sabotaging Your Financial Plan
The Less I Know the Better: How Over-Monitoring Your Investments Sabotages Your Success
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​References
¹Swensen, D. F. (2009). Pioneering Portfolio Management. Yale University Press. 
²New York Times. (2025, June 10). “Yale Endowment to Sell Private Equity Stakes at Discount.” 
³Yale Daily News. (2025, June 11). “Yale Soon to Sell Nearly $3 Billion in Private Equity.” 
⁴Morningstar. (2023, September 25). The slow way out: When semiliquid fund exits get too crowded. Morningstar.
⁵Ang, A. (2014). Asset Management: A Systematic Approach to Factor Investing. Oxford University Press.