When you hear people talk about liquidity, they are talking cash or investments that can easily be turned into cash in the short term. Liquidity is important to the individual investor for a number of reasons, such as money available for an emergency or protection from a short term downturn in the stock market. But too much liquidity can be a bad thing.

When people keep too much money in cash, they are giving up the opportunity to earn a return on that money if it was invested. Over the long term, the more cash you hold, the less you have invested and the lower your total returns will be.

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