What potential downside does one face with illiquid investments?

Illiquid investments pose the challenge of difficulty in selling when an investor needs to convert them into cash. Unlike more liquid assets, such as stocks or bonds, which can be easily sold on the market, illiquid investments do not offer the same level of buyer interest or trading volume. This can mean that if you need to access your funds quickly, you may be unable to sell the investment at its fair market value, or you might need to wait a long time to find a buyer. This characteristic can lead to potential delays, selling at a discount, or incurring additional costs. Understanding the nature of liquidity is essential for investors, as it impacts their ability to respond to changing financial needs or market conditions.

The other options do not directly address the fundamental issue of liquidity. High taxes may arise from various types of income or capital gains but are not inherently linked to the illiquidity of an investment. Low returns are a separate consideration based on the performance of the investment itself, regardless of its liquidity. Frequent market fluctuations pertain more to the volatility of certain assets rather than their liquidity. Thus, the primary concern with illiquid investments is indeed the difficulty in selling them when needed.