OPINION; The illiquidity trap: Why your assets can't pay bills and how to escape it

Picture this: You own a prime plot of land worth KSh 2 million. Your SACCO account holds KSh 500,000, and your investment portfolio includes blue-chip shares valued at KSh 300,000. On paper, your net worth stands at an impressive KSh 2.8 million.

But when your child's school suddenly demands KSh 50,000 in fees due next week, you face a harsh reality - none of these assets can provide quick cash without significant financial loss. This frustrating situation perfectly illustrates the illiquidity trap that ensnares many Kenyan investors.

The land dilemma is particularly acute in Kenya. Real estate remains a favoured investment but selling property typically takes 6-12 months to fetch fair market value. In urgent situations, sellers often accept 30-40% less just to access cash quickly.

That KSh 2 million plot could suddenly become just KSh 1.4 million in a distress sale - a painful KSh 600,000 loss simply because you needed immediate funds.

Even more conservative investments present liquidity challenges. Fixed deposits penalize early withdrawals by forfeiting interest accrued, while attempting to resell long-term government securities on the secondary market potentially carries interest rate risk and price risk.

This is where money market funds (MMFs) present a practical solution. These funds invest in short-term, low-risk instruments like Treasury bills while offering crucial liquidity advantages.

Consider this example: if you invest KSh 300,000 in an MMF earning 10% p.a compound interest, your investment would grow to approximately KSh 315,315 after six months. More importantly, you could withdraw the entire amount within 24-48 hours without penalties - a stark contrast to the months-long process and substantial losses involved in selling property quickly.

To properly safeguard against financial emergencies, follow this three-step liquidity planning approach: First, calculate your essential monthly expenses including rent, utilities, food, and education costs. Second, multiply this figure by 3-6 months to determine your ideal emergency fund size. Third, keep this amount in liquid assets while allocating remaining funds to higher-growth investments.

For instance, if your monthly expenses total KSh 50,000, maintaining KSh 150,000 in a money market fund creates a solid financial buffer while allowing you to pursue other investment opportunities.

Treasury bills offer another valuable tool for liquidity management. Investing KSh 100,000 in a 91-day T-bill at 12% interest would yield KSh 3,000 while preserving your capital. Though these instruments lock funds for fixed periods, you can create a liquidity ladder by purchasing new T-bills every month. This staggered approach ensures regular access to portions of your investment while maintaining a steady income stream.

The key to successful wealth preservation lies in balanced asset allocation rather than avoiding illiquid investments altogether. With KSh 1 million to invest, consider dividing it into three strategic portions: KSh 300,000 (30%) in liquid MMFs for immediate needs, KSh 400,000 (40%) in medium-term instruments like T-bonds, and KSh 300,000 (30%) in long-term growth assets such as land. This diversified approach ensures you're never forced into disadvantageous sales while keeping adequate funds accessible for emergencies.

Financial security requires more than just accumulating assets - it demands smart liquidity management. Take a moment to evaluate your current position: Could you access three months' worth of living expenses within 48 hours without incurring losses? If this question gives you a pause, it's time to restructure your portfolio.

Begin by building your liquid reserves today, then gradually implement a balanced investment strategy. Remember, true wealth isn't measured by paper value alone, but by your ability to access funds when life's unexpected expenses arise. By mastering this balance, you'll escape the illiquidity trap and achieve genuine financial peace of mind.

The writer is the Manager, Enwealth Capital Ltd