A safe haven is a low-risk — typically low-yield — asset that can perform consistently in times of market and economic volatility. Safe haven investments such as precious metals, currencies, defensive stocks, and more, can help investors navigate difficult economic conditions. However, investors should be aware that safe havens do not usually provide high returns.
Now more than ever, the stock market can feel like a roller coaster ride. One day the value of your investments can double, and the next they can be cut in half. While some volatility is unavoidable, investors can prepare their portfolios to weather financial storms by using safe-haven investments.
What is a safe haven?
Safe havens are a type of investment used during times of increased economic uncertainty that is expected to retain (or even increase) its value, even while other market assets might be depreciating. Investors like these because they limit exposure to losses in the event of a market downturn.
Now that you have some background information on safe-haven investments, let’s get into why the average investor should care, and how you can make safe-haven investments work for you.
Why investors should care
Safe havens are a smart way for investors to bulletproof their wallets and protect themselves when the market starts performing poorly. A worthy safe haven can become one of the bedrocks of an investor’s portfolio. They allow for low-risk investing during times of high economic volatility when the economy can easily take a turn for the worst.
Pros and cons of safe-haven investments
Here is a list of the benefits and drawbacks to consider.
- Keep (or even gain) value during a market downturn.
- Allows you to diversify a portfolio and minimize risk.
- Safe haven investments often provide income.
- Lower returns.
- Inflation and interest risk.
Advantages of safe-haven investments
Generally, safe-haven assets perform consistently throughout the year regardless of the economic climate in a given country. When paired with growth stocks and other assets, safe-haven investments can help spread risk more evenly throughout your portfolio, thereby limiting your losses during severe economic downturns.
The best types of safe havens do not typically decline in quality and are always necessary. For example, utilities make for good safe-haven assets because things like gas, water, and electricity are continuously needed.
Disadvantages of safe-haven investments
Despite all the good that can come from safe havens, there are also some drawbacks to consider before investing. For example, when the market is doing well, safe havens will typically receive a lower return on investment compared to other, perhaps riskier, stocks. This means investors looking to create a portfolio that maximizes returns should probably steer clear of safe havens.
Additionally, safe-haven investments, particularly T-Bills and bonds, are open to inflation risk. If inflation were to increase during a market downturn, buyers could be left with investments that have much less purchasing power than they did when inflation was low. Particularly now, with inflation rising in the U.S., investors are selling out of bonds, which has pushed up treasury yields. As always, it is important to pay attention to changes in the market and to new economic data as it is released.
How to start investing in safe-heavens
Due to their low-risk nature, safe-haven investments are great for experienced and beginner investors. Whether you’re looking for an opening into the stock market or hoping to diversify your portfolio a bit, consider speaking with an investment advisor about safe-haven investments.
Types of safe-haven investments
There are many different types of safe-haven investments that investors can use to their advantage. While this list is by no means exhaustive, it should give you a good idea of what to look for when deciding what constitutes a safe haven. Here are some of the most common examples.
Precious metals are a safe bet in the event of a market downturn because they’re often seen as a store of value, especially during times of rising inflation like we are currently experiencing. For example, gold is one of the most popular investments in times of downturns. Gold has historically has maintained its value over time, and is used by the U.S. government to protect the credibility of the dollar.
Silver is considered the sister precious metal to gold and is another favored precious asset in times of uncertainty. It’s less expensive than gold, making it more accessible to the common investor, and offers a good opportunity for diversification. Silver can be more volatile than gold, however, so buyers will want to do their research before buying.
Currencies are sometimes considered a safe haven in times of market volatility. The Swiss franc, Japanese yen, and U.S. dollar are all notable currencies that are safe havens due in part to their stable governments, independence from other countries, and overall positive economic growth expectancy.
The U.S. dollar specifically has been an attractive safe-haven asset. It is also the world’s reserve currency and a popular denomination for many international business dealings. However, holding large cash reserves during a period of high inflation is rarely a good idea.
Defensive stocks are those that provide consistent dividends and stable earnings regardless of the overall state of the stock market. Categories of defensive stocks include consumer staples, biotech, utilities, and healthcare, among others.
The Covid-19 pandemic in particular has displayed the value of healthcare and pharmaceutical stocks to full effect. The companies that offer stocks such as these are typically what you’ll hear referred to as blue-chip companies, which have the ability to operate at a profit in many different economic climates.
Treasury bills and bonds
Treasury bills, or T-Bills as they’re sometimes called, are backed by the full faith and credit of the U.S. government. When the T-Bill matures, the government will begin paying principal interest, and because the government is considered to have high creditworthiness, T-Bills are considered virtually risk-free.
Bonds can also fall into this category, especially those with a low risk of default. Bonds can provide the holder with a steady return on their investment regardless of how the market is performing. It is worth noting that the return on investment of these assets is low, so there is the risk of losing money when you calculate inflation.
When do safe-haven investments make sense?
Before investing in a safe haven, investors should carefully plan and consider the best options available for them. Those seeking a lower-risk opportunity would do well to keep safe-haven investments in their portfolio. However, if you are looking for higher-risk, higher-return investments, it might be better to pursue those avenues, and not look as much into safe-haven assets.
- A safe haven is a type of investment used during times of increased market uncertainty that is expected to increase or retain its value. They are often low-risk, low-return investments that perform consistently regardless of current economic and market trends.
- Examples of safe havens include precious metals, currencies, defensive stocks, and treasury bills. It is always good to look for things that are considered necessary, as these will continuously hold value for the long term. However, investors should be wary that what constitutes a safe haven can change depending on market conditions.
- The specific assets that are deemed safe havens can vary depending on the state of the market, so it’s crucial for investors to do their research before purchasing.
- Safe haven investments, particularly currencies, T-Bills and bonds, are subject to inflation risk and provide lower returns on investments during periods of economic growth. They are not the best choice for buyers who are looking to take risks and maximize returns.
- Diversification is key so that investors can both take advantage of economic growth and be protected during market downturns.
View Article Sources
- Customer Advisory: Beware of Gold and Silver Schemes — Commodity Futures Trading Commission
- Saving and Investing — Office of Investor Education and Advocacy
- How To Invest In The Stock Market: 8 Basic Concepts — SuperMoney
- What are Cyclical Stocks? — SuperMoney
- Beginner’s Guide to Investing — SuperMoney
- 2022 Inflation Study — SuperMoney
- Best Online Brokers for Stock Trading in 2022 — SuperMoney
- Best Investment Advisors | April 2022 — SuperMoney