Definition and Examples of a Safe Haven
Investing means accepting some level of risk. The stock market can be volatile, causing the value of a share to rise and fall very quickly. Investors worried about excess volatility in their investment portfolios may want to look for safe havens. Bonds are a classic example of a safe haven asset. High-quality bonds with a low risk of default continue to pay interest through good times and bad. If a bond offers 4% interest, for example, investors know they’ll earn 4% returns from the bond as long as the bond issuer does not default. This can make bonds a safe haven during stock market downturns.
Types of Safe Havens
There are many types of safe haven investments investors can acquire. Here are some common examples.
Precious Metals
Precious metals are a popular safe haven asset as they are viewed as relatively stable in price and a good hedge against elevated levels of inflation. Gold and silver are two of the most popular precious metals, but others are also routinely traded.
Bonds
Bonds, especially highly rated bonds with low default risk, are a good safe haven asset. As long as the issuer doesn’t fail to pay returns and the investor does not need to sell the bonds soon, the bond holder can rely on steady returns regardless of how the wider market fares. However, bonds can be prone to inflation risk if prices rise significantly.
Defensive Stocks
Some companies are known or expected to weather economic downturns well. These are typically blue-chip companies that participate in sectors of the market that are always needed, such as consumer staples or utilities. While the prices of defensive stocks will likely drop during a market downturn, they often do not fall as far as other share prices.
Cash and Currencies
Cash, especially the U.S. dollar, is one of the safest assets if held at an FDIC-insured bank. If you put money in a savings account, you can feel confident it is safe, even if you’re earning a low interest rate. However, if inflation rises, cash will lose some degree of its purchasing power.
Real Estate
Real estate is another popular safe haven. Everyone needs a place to live, so even during major economic downturns, real estate prices frequently hold steady or only slip slightly. You can invest in real estate by buying your own home or through real estate investment trusts (REITs), which buy and manage different types of properties.
Pros and Cons of a Safe Haven
Pros Explained
Retain or gain value during a market downturn: If you’re worried about a market downturn, safe haven investments are a good way to preserve your capital or even earn a small return when other assets are losing value.Safe haven investments often produce income: Many safe haven investments, such as bonds and blue-chip stocks, produce income you can use to pay for living expenses or reinvest.
Cons Explained
Reduced risk generally means lower returns during buoyant markets: When investing, risk and return are generally linked. The less risk you accept, the less return you’ll receive. Safe haven investments are less risky than other investments, so you usually must accept lower returns.Inflation risk: Many safe haven investments are subject to inflation risk. If inflation spikes during a market downturn, you could be left with investments that may be worth the same number of dollars, but that have far less purchasing power.
Is a Safe Haven Worth It?
Safe haven investments can play an important role in any investor’s portfolio. Diversifying your investments by buying a mix of different assets can help your portfolio experience less volatility and earn higher returns. Splitting your portfolio between some riskier assets and some safe haven investments is a good idea. How much you want to put into each type of investment will depend on your risk tolerance. If you have a high risk tolerance, you might only put a small amount into safe havens, hoping for big returns from your riskier investments.
What It Means for Individual Investors
Individual investors should think about their investment goals and risk tolerance. If you’re worried about market performance or losing a lot of money, you might want to focus on investing in safe haven assets. By contrast, those seeking a higher-risk, high-reward portfolio should avoid safe havens, as they typically offer lower potential returns.
