What are the most common risks of long-term investments? (2024)

Long term investments are typically made with expectations of making a larger corpus for more important goals. It is possible that around the maturity date or while nearing the goal realization valuation, the underlying asset may lose value or stagnate. This risk arising out of market conditions is something that invetsors need to factor in while investing for the long term.

Market risk is never going away. There is always going to be ups and downs. Theoretically, the ups outweigh the downs long term. It is good to set expectations with each investment, understand the role it plays in your portfolio, and build around your needs.While it is important to consider this risk, it is equally (if not more) important to build your portfolio around your time horizon and withdrawal needs. You can't really mitigate this risk, and reducing it is not easy either.

An example of liquidity risk would be a property that someone invested into, with the expectation of valuation gain. Somehow if the valuation gain does not happen over time, the investor may be stuck. Diversification is key in such cases and invetsor should make sure not to over invest into one asset.Another example would be of long term bond investments. Secondary market sale may pose some risk depending on the rating, liquidity and attractiveness of that paper. Fluctuations in interest rates may pose a real risk while selling such a long term bond holding. These are covered under credit and interest rate risk.

This risk has to do with aligning your goals/expectations for a particular investment, and ensuring it meets the needs of your withdrawals and use of funds. No need to avoid anything when you know the purpose of that dollar in your portfolio.

As an investor, understanding and managing liquidity risk is crucial. Liquidity risk refers to the possibility of not being able to sell an investment quickly or at a fair price when needed. For instance, investing in real estate can pose challenges in finding buyers or securing favorable deals promptly.To mitigate liquidity risk, it's wise to maintain a portion of your portfolio in cash or liquid assets. Additionally, avoid investing heavily in illiquid or niche markets. Planning ahead for your cash flow needs can also help, ensuring you don't have to sell long-term investments at a loss due to immediate liquidity requirements. This proactive approach can safeguard your portfolio against the uncertainties of liquidity constraints.

I think there is a real concern for credit risk in this climate. Rates are high, with not a ton of data to back cuts. Companies will see profit margins shrink. However, I don't think it is anymore real than last year, or even 10 years. I don't think rates will slow down the need for activity. Companies need access to debt, and growth is not getting any cheaper. I don't heavily consider credit risk when I use a bond as the cash flow strategy, because I stick to investment grade or government bonds. I consider credit risk if I am chasing yield because I am actively going towards a different strategy. This is just my opinion!

John Maynard Keynes to wit, famously quipped: "In the long run we are all dead."Paraphrasing the above, it's impossible to mitigate all the long term risks. The best one can do is allocate prudently based on your goals and your desired time-frame.