Drawbacks to Long-Term Investing
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Drawbacks to Long-Term Investing
While long-term investing offers many advantages to investors, it also carries with it disadvantages and risks that need to be considered, including liquidity, business risk, and the effects of interest rates and inflation.
Things To Know
- Liquidity is a problem for many long-term investments.
- The longer you hold an investment, the more you may suffer from "business risk."
- Holding onto investments for longer periods also exposes you to inflation and changes in interest rates.
Liquidity risk
The ability to convert an investment into cash is called liquidity. A liquid investment is one that is easily changed into cash. An illiquid investment is not easily converted into cash. An investment is said to be marketable if it can be easily sold to a readily available market.
The disadvantage of many long-term investments is that many are illiquid. Others may be converted into cash, but only with the risk of significant loss. Long-term investments are therefore not ideal for earning income to meet upcoming obligations such as living and medical expenses.
Business risk
Holding onto investments for longer periods also exposes you to increased business risk. This is the risk that the business you invest in will fail or become less profitable, decimating the value of your investment.
Consider inflation and interest rate changes
Long-term, fixed investments such as bonds also run the risk that their values will decrease due to a rise in interest rates. Inflation must also be taken into consideration when planning on future returns from long-term investments. Your investment returns must outpace inflation in order to increase your purchasing power.
Long-term investing generally offers the potential for higher returns; however, you must keep in mind the risks and disadvantages as well.
