A portfolio built for a long-term horizon might reasonably be expected to hold very little cash. Over long periods, cash has historically delivered lower returns than many other asset classes. Holding it can appear to be a drag on performance.

Long-term portfolios often hold more liquidity than the horizon alone would suggest, and the reason has less to do with return than with retaining the ability to act.

Liquidity is optionality

Illiquid assets can be difficult to sell quickly, and selling them under pressure may require accepting a lower price than their long-term value would justify. A portfolio holding a substantial allocation to infrastructure, property and private markets therefore requires liquid holdings elsewhere to meet its obligations without forcing those sales.

Those obligations are continuous. Benefit payments fall due. Capital commitments to private markets managers are called at times determined by the manager rather than the investor. Currency hedging positions require settlement.

While many of these obligations can be forecast in aggregate, their timing is often uncertain.

Liquidity provides the flexibility to meet those commitments without disturbing the portfolio’s long-term investment positions.

The cost is real and it is accepted deliberately

Holding liquidity has a cost. During strong markets, capital held in cash is likely to earn less than capital invested in growth assets, and that difference can be visible in short-term performance.

That cost buys something specific.

It buys the ability to rebalance during a market decline rather than becoming a forced seller into one. It buys the capacity to fund a capital call during periods of market stress. It buys the option to act rather than react.

An investor forced to sell assets in order to meet an obligation has lost control of both timing and price. Liquidity helps prevent that outcome.

Risk is managed, not avoided

Liquidity sits within a broader approach to risk management.

Risk is not something a long-term portfolio seeks to eliminate. A portfolio with no risk would be unlikely to generate the returns required to meet the objectives it exists to serve.

The challenge is deciding which risks are worth taking, sizing them appropriately, and structuring the portfolio so that no single risk determines the outcome.

Market risk has historically been associated with long-term investment returns and is taken deliberately. Forced-seller risk is generally uncompensated and is therefore managed wherever possible.

That distinction explains a great deal about portfolio construction.

Concentration risk is managed through diversification across asset classes, managers, geographies and investment vintages. Counterparty risk is managed through oversight of the managers and providers we appoint. Liquidity risk is managed by maintaining liquid holdings before they are required.

Testing before it happens

The portfolio is tested against stressed conditions rather than average ones.

Scenario analysis examines how the portfolio may behave when several markets fall at the same time, when asset correlations increase, or when liquidity becomes constrained across multiple asset classes simultaneously.

The objective is not to predict specific events. It is to establish in advance that the portfolio can continue to meet its obligations under conditions significantly more challenging than those currently being experienced.

When periods of genuine stress occur, the question of whether commitments can be met has already been considered.

Why liquidity matters

Liquidity is sometimes viewed as a trade-off against return. In reality, it is an important part of portfolio resilience.

Maintaining liquidity helps ensure obligations can be met, supports disciplined rebalancing during periods of volatility, and provides flexibility when opportunities emerge.

For long-term investors, liquidity is not held because markets are expected to fall. It is held because uncertainty is an unavoidable feature of investing, and resilience depends on being prepared for it.