Part of: Investment Time Horizon
Typical Characteristics of Long-Term Investments: High Risk, Low Liquidity, High Return
When it comes to some high risk investments (i.e. stocks), time has a way of neutralizing risk. This is why in 2008 some stock market investors were down over 35% while historically the stock market returns approximately 10% annually. It is acceptable for long-term investments to be high risk because over time probabilities determine performance. Remember, the market is cyclical. There are high and lows, peaks and valleys. These extremes are amplified in the short-term, but subdued in the long-term.
Liquidity is the ability to quickly convert assets into cash without losing value. Some longer term investments are subject to liquidity risk. Because these are long-term investments, the liquidity shouldn’t matter much. But be aware that if you require these assets for any sort of emergency, you may sacrifice gains or even part of the principal when liquidating.
When you’re willing to accept more risk and give up liquidity, your returns will generally be higher. Everybody wants higher returns, but everybody also has different levels of acceptable risk and different needs in liquidity.