From time to time, clients would ask for my thoughts on an investment idea they were considering. Their proposals ranged from private real estate deals to cryptocurrency, but one question among many that I always asked was: If they needed their money back, could they sell the investment quickly with minimal financial penalty?

If the answer was no, that had significant implications. First, they couldn’t rely on those funds for emergencies or planned expenses, like paying for college in four years. Second, they should expect a higher return to compensate for the liquidity risk. An S&P 500 ETF, for instance, can be sold in seconds. The $100,000 invested in a brother-in-law’s restaurant? Not so much.

Here are some common investments that can be difficult to liquidate when you need cash:

Annuities and cash value life insurance policies

Annuities and cash value life insurance policies should be carefully evaluated before investing. Many annuities offer features like guaranteed lifetime withdrawals, but they come with strings attached. A major drawback is surrender charges, which penalize early withdrawals. If you invest $50,000 in an annuity with an 8% surrender charge, you’ll lose $4,000 if you cash out early. These charges can last for years, making your money effectively locked up.

Some proprietary mutual funds

Certain mutual funds — especially those exclusive to a brokerage — may limit your ability to transfer them elsewhere. Most funds are freely transferable, but exceptions exist, such as Fidelity’s Zero Funds, which have no management fees but currently can’t be moved to another custodian. This isn’t a big issue in retirement accounts, but in taxable accounts, moving funds may trigger capital gains taxes. In some cases, choosing an extremely low-cost (but transferable) alternative might be a better option.

Non-publicly traded REITs

Real Estate Investment Trusts (REITs) provide a way to invest in real estate through the stock market. Publicly traded REITs can be bought and sold like stocks, but non-publicly traded REITs often come with high commissions and liquidity restrictions. Operators may promise strong returns, but getting your money back can be an ordeal. Some investors have spent years making repeated calls and sending certified letters just to get their money back. While some non-publicly traded REITs may perform well, consider whether the potential hassle is worth it.

Private equity and venture capital funds

Boulder County has long been a hub for startups and innovation, attracting venture capital and private equity investment from across the country. Private equity funds pool investor money to acquire and manage private businesses, often with the goal of improving them before selling at a profit. Venture capital funds, on the other hand, focus on investing in early-stage companies, hoping to capture high growth in exchange for taking on significant risk.

Despite often high fees, these funds can generate strong returns, but they are highly illiquid. Investors typically commit capital for long periods — often seven years or more — before seeing a return. Unlike publicly traded stocks, these investments cannot be sold at will, meaning you must be prepared to leave your money tied up for an extended period.

Other illiquid investments

Other types of illiquid investments can also present challenges. Real estate partnerships often require approval from other partners before an investor can exit. Direct investments in commercial or residential real estate take time to sell and come with transaction costs. Collectibles such as art or rare coins can take months or even years to sell at a fair price. Certain bonds, including many municipal bonds, can be difficult to sell before maturity without incurring high costs.

The bottom line

I’m not suggesting you avoid these investments. Many can be valuable parts of a portfolio. But before committing money, understand the potential costs and the timeline for getting your cash back. Liquidity matters — sometimes more than you think.

David Gardner is a certified financial planner and is admitted to practice before the IRS. He recently retired from an independent investment advisory firm and continues to write about financial topics. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.