Safe Haven for Investments: Meaning & Examples

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.

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.

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.

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.

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.

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.

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, 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.

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.