What kind of risk is associated with investments not being able to be sold quickly?

Liquidity risk refers to the potential for an investor to be unable to quickly sell an investment at its current market value due to a lack of buyers. This type of risk arises when investments are not readily tradable, which can happen for various reasons, such as market conditions or the inherent characteristics of the asset. When liquidity is low, investors may need to sell their holdings at a discount to attract buyers, resulting in losses.

In a retirement plan context, understanding liquidity risk is essential because it can affect the ability of participants to access their funds or reallocate investments in a changing market environment. Choosing investments with higher liquidity generally allows for greater flexibility and less exposure to this type of risk, making it a critical consideration in the asset allocation process for retirement planning.