A safe haven is a type of investment expected to retain or increase in value during times of market turbulence. Investors seek out safe havens to limit their exposure to losses during market downturns.
However, the assets that are deemed safe havens can vary depending on the specific nature of the down market. Therefore, investors should perform ample due diligence to pinpoint the right safe haven for their needs.
Key Takeaways
- Safe haven investments offer protection against market downturns.
- Precious metals, certain currencies, and stocks from particular sectors have been identified as safe havens in the past.
- Safe heavens during one period of market volatility may react differently in another, so consistent portfolio diversity is key.
Understanding Safe Havens
A safe haven investment can diversify an investor’s portfolio and may be particularly beneficial in times of market volatility. Often, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession, when the downturn of the market is prolonged. When markets are in turmoil, many investments can fall sharply in value.
During such systemic events, some investors look to buy safe-haven assets that are uncorrelated or negatively correlated with the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.
Examples of Safe Havens
Several types of investment securities are considered to be safe havens.
Gold
For years, gold has been regarded as a store of value. As a physical commodity, it cannot be printed like money, and its value is not affected by interest rate decisions made by governments.
Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When such events occur, investors often pile their funds into gold, driving up its price.
Other commodities, such as silver, copper, sugar, corn, and livestock, also have attributes that make them negatively correlated with stocks and bonds, thus serving as viable safe havens.
Treasury Bills
Treasury bills (T-bills) are debt securities backed by the full faith and credit of the U.S. government, making them considered safe havens even in tumultuous economic climates. T-bills are viewed as risk-free, as the principal invested is repaid by the government upon maturity. Investors flock to these securities during periods of perceived economic chaos.
Defensive Stocks
Regardless of market performance, consumers continue to purchase essentials like food, health products, and basic home supplies. Companies operating in the defensive sector, such as utilities, healthcare, biotechnology, and consumer goods, typically retain their values during times of uncertainty, increasing investor demand for their shares.
Cash
Cash is often considered the only true safe haven during periods of a market downturn. However, cash offers no real return and is negatively impacted by inflation.
Currencies
Certain currencies are considered safe havens. In volatile markets, investors and currency traders may seek to convert holdings of cash into these currencies for protection.
The Swiss franc, for example, is deemed a safe-haven currency due to the stability of the Swiss government and financial system. The Swiss economy boasts a large, stable banking industry, low-volatility capital markets, and positive trade balance figures.
In addition to the Swiss franc, other currencies like the Japanese yen and the U.S. dollar (USD) can also be considered safe-haven assets depending on the specific market challenges. The U.S. dollar, as the world’s reserve currency, often steps into this role during domestic currency uncertainty.
Morgan Stanley noted that the U.S. dollar played its safe-haven role effectively in challenging years like 2022, helping diversify portfolios due to its negative correlation with global equities.
Real estate, such as homes and Real Estate Investment Trusts (REITs), also can make good safe-haven investments.
Special Considerations
The assets listed above are not guaranteed to maintain their values during market volatility. What constitutes a safe haven changes over time. For example, if an entire sector performs poorly but one company within that sector performs well, its stock may be considered a safe haven.
Investors should conduct due diligence when considering safe havens. An asset that is considered a safe haven in a downturn may not be a good investment when markets are rising.
Are Safe Havens Good for My Portfolio?
Safe havens can be one way to diversify a portfolio to protect against risk. They offer stable returns during unstable times. Though their low risk comes with lower potential returns, they can provide stability when high-risk investments struggle.
How Does Inflation Impact Safe Havens?
Inflation erodes the purchasing power of investments, even safe havens. Rising inflation coupled with a drop in investment value is a concern. While safe havens may not drop as much as other investments, they still suffer from inflation’s impact on value.
Is a Safe Haven Worth It?
It depends on your investment goals. Safe havens are lower risk (lower return) investments that help diversify a portfolio, balancing out the higher risks of investments that offer potential for higher returns. Having both types of investments can make sense for many investors.
The Bottom Line
Safe haven investments can be a smart option for many investors. While they offer stability and potentially increasing value during market downswings, they also provide less return during market strength due to their lower risk.
Related Terms: Gold investment, Treasury Bills, Defensive Stocks, Currencies, Portfolio Diversification.
References
- J.P. Morgan Asset Management. “Rethinking Safe Haven Assets.”
- World Gold Council. “Gold as a Store of Value”.
- Federal Reserve Bank of St. Louis. “The Gold Standard and Price Inflation”.
- TreasuryDirect. “Treasury Bills”.
- The Swiss National Bank. “A Safe Haven: International Demand for Swiss Francs During the Euro Area Debt Crisis”.
- Tax Justice Network. “Financial Secrecy Index 2022”.
- Congress.gov. “The U.S. Dollar as the World’s Dominant Reserve Currency”, Page 1-2.
- Bloomberg. “Goldman Says Yen Shows Significant Value as a Recession Hedge”.
- Morgan Stanley. “Why Valuation May Be Key to Defensive Investing in 2023.”
