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Liquidity Shock: The Hidden Risk in Modern Markets

2018/04/05

Summary

The risk of volatility spikes and liquidity shortages is rising, and it could get worse with new “quantitative tightening” policies from central banks. Politicians and regulators may eventually step in, but investors should take steps now to help guard against the possible loss of liquidity.

Key takeaways

  • Recent bouts of market turbulence have been brief but dramatic – a reminder to investors that liquidity shortages could make portfolios more vulnerable
  • New financial products, automated technologies and changing regulations are adding to volatility spikes and liquidity woes – and higher rates could make matters worse
  • To buffer against liquidity shocks, consider making portfolios more diversified, using liquid derivatives and building in enough time to recover from potential losses

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