No investment is completely free of risk.

When it comes to investing, it’s critical to understand that no investment is 100% safe and all investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

Investing means that you’re putting your money to work into a financial asset in the expectation of getting a positive return. Yet, where there’s the chance of financial gain, there’s always going to be the chance of a financial loss. Investment risk and investment reward are two sides of the same investing coin.

On the other hand, saving — which is basically parking your money in an account so it’ll keep its value.

Some investments are considered safer than others, but no investment is completely free of risk, because there’s more than one kind of risk, according to SoFi.

Different Types of Risk

Investors who choose products and strategies to avoid market volatility may be leaving themselves open to other risks, including:

• Inflation risk – An asset could become less valuable as inflation erodes its purchasing power. If an investment is earning little or nothing (a certificate of deposit or savings account, for example), it won’t buy as much in the future as prices on various goods and services go up.
• Interest rate risk – A change in interest rates could reduce the value of certain investments. These can include bonds and other fixed-rate, “safe” investment vehicles.
• Liquidity risk – Could an asset be sold or converted if the investor needs cash? Collections, jewelry, a home, or a car could take a while to market—and if the owner is forced to sell quickly, the price received could be lower than the asset is worth. Certain investments (certificates of deposit, some annuities) also may have some liquidity risk because they may offer a higher return in exchange for a longer term, and there may be a penalty if the investor cashes out early.
• Tax risk – An investment could lose its value because of the way it’s taxed. For example, different types of bonds may be taxed in different ways.
• Legislative risk- A change in law could lower the value of an investment. For example, if the government imposes new regulations on a business, it could result in higher costs (and lower profits) for the company or affect how it can serve its customers. Or, if taxes go up in the future, savers who put all or most of their money into tax-deferred accounts [IRAs, 401(k)s, etc.] could end up with a hefty tax bill when they retire.
• Global risk – An investment in a foreign stock could lose value because of currency problems, political turmoil, and other factors.
• Reinvestment risk – When an investment matures (think CDs and bonds), the investor might not be able to replace it with a similar vehicle that has the same or a higher rate of return.

Taxes

“Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.” Jay Leno

Taxes are a key consideration for investors – and not one that investors might think about when logging into their brokerage account. Yes, $0 trades are exciting, but don’t forget about taxes — which are an investors “biggest expense” or every traders “silent partner”.

The key to taxes is to not just think about taxes in tax season, because there’s not that much you can do besides contribute to an IRA.

When it comes to tax planning, most of it has to be done before the year is over. One strategy that’s very useful is tax-loss harvesting. Essentially, it allows investors with any sort of investment losses to use that to offset any gains, reducing the amount of taxes owed.

Investors can use the tax-loss harvesting proceeds to buy something else, and it can even be very similar. Or they can use the money to rebalance. “Don’t hesitate to take losses and use them to your advantage,” said Hayden Adams, director of tax and financial planning at Charles Schwab. “You’re likely to have losses and tax-loss harvesting is a great way to rebalance to get back to proper risk tolerance.”

The key for investors is to know the rules and work within them.

References:

1. https://www.sofi.com/learn/content/what-is-a-safe-investment/
2. https://www.businessinsider.com/safe-investments
3. https://finance.yahoo.com/news/what-new-stock-traders-need-to-know-and-do-before-the-end-of-the-year-192426159.html