There are several potential pitfalls to consider when it comes to long-term investing:
- Market risk: Long-term investments are subject to market risk, which means that the value of your investment may go up or down depending on market conditions.
- Inflation risk: Over the long term, the purchasing power of money can decline due to inflation, which means that the same amount of money may be worth less in the future. This can erode the value of your long-term investments if they are not earning a return that is high enough to compensate for the loss of purchasing power due to inflation.
- Interest rate risk: Long-term investments may be subject to interest rate risk, which means that the value of the investment may be affected by changes in interest rates. For example, if interest rates rise, the value of long-term bonds may decline, while the value of short-term bonds may rise.
- Credit risk: Long-term investments in fixed income securities, such as bonds, are subject to credit risk, which is the risk that the issuer of the security will default on its obligation to pay the promised interest and principal.
- Liquidity risk: Long-term investments may be less liquid than shorter-term investments, which means that it may be more difficult to sell them if you need to access your money.
- Diversification risk: It is important to diversify your long-term investments to spread risk and reduce the impact of any single investment on your portfolio. However, if you are not properly diversified, you may be exposed to higher levels of risk.
- Management risk: If you choose to invest in a managed fund, such as a mutual fund or exchange-traded fund (ETF), you are relying on the skills and judgment of the fund manager to make investment decisions on your behalf. If the fund manager does not perform well, it can have a negative impact on the value of your investment.