When choosing an investment strategy, risk is major factor in the decision. Regardless of your risk appetite, it is generally considered a good idea to have some of your money invested in stable, reliable assets. There are known as safe havens.
Safe haven assets are attractive investments for people who want to limit their exposure and vulnerability to the ever-moving financial markets.
In the same way a safe haven is seen to provide safety and shelter from something scary or dangerous, a safe haven investment offers some protection in times of economic uncertainty.
Below, we discuss the idea of low-risk investment strategies and the four groups that are considered safe haven assets. We talk about the pros and cons of each one- and answer some of the frequently asked questions on the topic.
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What Will I Learn?
- An Introduction to Safe Haven Investments
- The Pros and Cons of Safe Haven Assets
- Best Safe Haven Assets 2023
- The Bottom Line – Why Do Safe Haven Assets Attract Investors
- FAQs – What Are Safe Haven Assets
- What are the characteristics of safe haven assets?
- What are examples of safe haven currencies?
- What asset has no risk?
- Is Cryptocurrency a safe haven asset?
- What are the most risky assets?
- Is the dollar a safe haven currency?
- What is the best safe asset?
- What asset never loses value?
- What is the safest investment with the highest return?
An Introduction to Safe Haven Investments
In the world of trading, the term safe haven applies to an investment or financial instrument that is most likely to remain reliable and retain its value regardless of market turbulence. Sudden market downturns can send stocks tumbling- taking hard-earned savings with them.
Of course, the risk is just a part of trading that can never be fully negated- and even safe haven assets do not come with a 100% guarantee- but they have certain characteristics that increase their likelihood to survive- and even thrive- in a financial crisis.
What are safe haven asset classes? To be awarded safe haven status, an investment must meet the following criteria:
- They must have high liquidity.
An asset’s liquidity is determined by how easy it is to convert to cash when you need it- without having to pay any penalties. Safe haven assets are highly-liquid.
- There has to be a stable demand.
To be considered a safe haven, an asset must have reliable demand- meaning it has a consistent and predictable consumer base. People still need to want these assets- even during domestic or international uncertainties.
- An asset must be relevant and have no easy replacement.
Safe havens are continuously relevant in the stock markets and in global finance. They are not easily replaced by something else.
- Values should be expected to remain the same or increase during economic uncertainty.
The most important factor for safe haven assets is their ability to retain or increase in value during economic instability. It is the prime reason people choose them.
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The Pros and Cons of Safe Haven Assets
Generally speaking, safe haven assets are beneficial for most investors- regardless of their goals- but there are a couple of things to think about. Here is a brief summary of the overall pros and cons of safe haven assets (we will talk specifics a little later on!).
- They are the most stable investment options during uncertain or volatile economic situations.
- Safe haven assets usually perform well all-year round- you don’t need to wait for a downturn for them to be worthwhile.
- Diversifying your portfolio with safe haven assets helps spread risk- especially if you combine them with some growth stocks with higher risk profiles to generate capital gains.
- There is no guarantee that a safe haven asset today will still be a safe haven asset in the future.
- Although it is less likely, safe haven assets can still suffer in an economic downturn, so diversification is very important.
- Your position may suffer or stay the same in rising stock markets- since safe haven values tend to be at their highest in volatile markets.
Best Safe Haven Assets 2023
Currently, there are four core types of investments that are confirmed safe havens. There are some other potential safe haven assets out there, but these are the most reliable for 2023. When people ask, ‘What are the safest assets in a crash?’ these are universally considered the top choices.
The first thing most people think about when they hear ‘safe haven asset’ is gold. Gold and other precious metals have long been regarded as a reliable way to diversify a portfolio and protect wealth against inflation and market dips.
Another benefit of gold is that it is a physical commodity- not just something on paper. Once you buy gold, it is always there- held safely in a secure storage facility until you decide to liquidate it.
Gold is not the only precious metal that qualifies as a safe haven asset- although it is the most popular. Silver also works for the same reasons, although there are better options with gold.
You can invest in gold in several ways. Some people simply buy gold and store it in a location of their choice- but you can also roll over part of your 401(k) retirement savings into a gold IRA for long-term tax-advantaged savings.
Best gold IRAS let you deposit large amounts of money tax-free and use it to purchase IRS-approved precious metals.
They are connected to custodians, trustees, and storage facilities that help ensure compliance and security- ensuring you get the most from your investment and avoid fees and penalties from the IRS.
Why Choose Gold?
- Gold has been a stable asset for many years, and that is extremely unlikely to change.
- The value of gold cannot be reduced by simply printing more- affording it some protection against the macroeconomy.
- When the value of the US dollar takes a downturn, the price of gold usually increases- meaning it is the perfect hedge to retain your wealth.
- Precious metals- gold especially- has intrinsic universal value- regardless of economic turmoil.
Downside of Gold
- Depending on how to purchase and store your gold, the liquidity can be reduced. A gold IRA, for example, applies penalties for withdrawals made before the age of 59 and a half.
- It is difficult to store gold at home- so you may not have immediate access in an emergency.
- Gold’s value is demand-driven- and closely tied to the dollar. It is volatile- so bad timing could leave you a little in the lurch.
Overall, gold is an excellent long-term investment for retirement savings and hedging against inflation- but there are rules and regulations imposed by the IRS if you want to save it in a tax-advantaged account.
#2: Government Bonds
Government bonds are widely considered some of the safest low-risk investments of all. Treasure bills and bonds are backed by the US government in full faith- meaning you are repaid the principal investment- plus the outstanding interest when the asset matures.
They are fixed-income instruments- issued when the government or approved corporations need to increase their capital. It works similarly to a loan- in that you get the money returned to you with a little extra, when applicable.
Why Choose Government Bonds?
- The government backs these bonds. Because of their high creditworthiness, they have a much lower risk factor.
- Your investment will be returned to you on the maturity date, along with interest.
- Treasury bonds are as close to risk-free as an investment gets.
- You have strong legal protection with government bonds.
Downside of Government Bonds
- Bonds such as treasury bills are impacted by interest rates and inflation.
- There is a relatively small return on these types of investments- so they are not excellent in terms of gains.
- Some of these bonds are very long-term- sometimes up to 40 years- so they could lose value over time.
In short, if you are looking for an investment with as little risk as possible from an entity with reliable credit and a legal obligation to return your money, government bonds are the way to go. You may not make much profit, depending on the duration of the bond, but you are also unlikely to lose money.
#3: Foreign Currencies
Let us start by saying that not all foreign currencies are safe haven assets. There are currently three safe haven currencies to invest in.
- US Dollar
The US Dollar is the world’s reserve currency- and has been for over six decades. It is closely tied to gold, and most other currencies are pegged to its value. Because of this, it is the currency used in the majority of international business dealings- and it is considered a safe haven.
During times of market volatility, people often cash in their investments for US Dollar or US Dollar-backed treasury bonds and bills. It is seen around the world as stable and robust- making it an appealing safe haven asset.
- Swiss Franc
Switzerland has arguably the most low-volatility capital market in the world- as well as stable banking, tax-friendly policies, and very few risks to the internal market. The country has almost no unemployment and a high living standard- and its currency benefits as a result.
Another reason the Swiss Franc qualifies as a safe haven currency is its independence from the EU- protecting it from economic or political events that often impact other currencies in the region.
- Japanese Yen
The Japanese Yen tends to perform well during market downturns- and when the global markets move toward low-risk trends. Japan has an account surplus, high exports, and many foreign assets holdings- putting its currency in a strong position.
Why Choose Foreign Currencies?
- You can use your foreign currency safe havens in day trading for fast-moving, low-risk investing.
- There is an element of stability offered through safe haven currencies during market downturns.
- The unrivaled liquidity of currency investments leaves you free to invest as, when, and how you want to.
Downside of Foreign Currencies
- All currencies are subject to inflation- and there is always some risk that values will drop unexpectedly.
- These currencies are less likely to yield high returns in a short time because they are not very volatile.
To sum things up, these three currencies are the core safe haven choices in this asset class.
Although they are still subject to volatility and inflation, they have historically outperformed the rest- and are considered the most reliable of all. If flexibility and liquidity are your priorities- foreign currency is a solid option.
#4: Defensive Stocks
The stock market tends to be at the center of any financial crisis- but not every stock is risky. There are some safe haven stocks, known as defensive stocks, that provide a lot more security than others.
A defensive stock is an investment in a company or industry that has a tendency to remain strong through turbulent times- usually because their products are considered consumer staples.
Some examples of this include healthcare, home supplies, food, and utilities. Regardless of the economic condition, people still need to eat, clean their houses, use gas, water, and electricity, and look after their health- so it stands to reason these companies should do alright.
If the product is something people need to live, it is considered a safe haven defensive stock.
Why Choose Defensive Stocks?
- Defensive stocks offer the possibility for substantial long-term gains with significantly less risk than other stocks and equities.
- People will always need certain services- so you can enjoy some level of reliability.
Downside of Defensive Stocks
- Gains tend to be quite low during bull markets.
- If the timing is wrong, they may not bring you the returns you are hoping for.
Although defensive stocks still carry risk, it is lower than their counterparts- and they still provide the possibility of attractive gains if you get in at the right time.
Picking the companies wisely is important, and not waiting until a market downturn has already happened is key.
The Bottom Line – Why Do Safe Haven Assets Attract Investors
Why do people buy safe haven assets? Put simply- they want investments in their portfolios they can count on to see them through market turbulence and economic uncertainty. They provide stability, liquidity, and some protection from the ever-changing financial markets.
In the event of a global financial crisis, safe haven assets such as gold, defensive stocks, specific currencies, and government bonds are the ones that are most likely to come out on top, and investors with holdings should find themselves in a better position.
No investment is completely risk-free, and there are never any guarantees of profits and gains. However, safe haven assets are the closest things- and are beneficial for any portfolio.
Diversification is the key to success- since different asset classes perform better at different times. Speak to your financial advisor about how best to distribute your investment capital.
FAQs – What Are Safe Haven Assets
What are the characteristics of safe haven assets?
A safe haven asset must have stable interest and demand- as well as long-term relevance. They must also be considered irreplicable- and be able to hold their value during complicated or difficult economic times, such as a sudden market downturn. Lastly, safe haven assets should be liquid.
What are examples of safe haven currencies?
There are three leading safe haven currencies in 2023:
- The US Dollar
- The Japanese Yen
- The Swiss Franc
What asset has no risk?
There is no asset that can be called 100% risk-free- but US Treasury bonds are as close as it gets.
Is Cryptocurrency a safe haven asset?
Currently, cryptocurrency is not considered a safe haven asset- although some recent market movements for Bitcoin (the largest of all the cryptocurrencies) show signs that it could be heading that way.
There are many risks involved with crypto investments, but Bitcoin has been seen to outperform some well-established safe haven assets in recent times.
What are the most risky assets?
Equities are the most risky asset class (generally speaking) because they do not offer any guarantees- and are at the mercy of the successes and failures of businesses.
The market is highly competitive- and investing in company equities is essentially a sophisticated gamble on their ability to come out on top.
Is the dollar a safe haven currency?
Yes, it is. The dollar is considered a safe haven currency because it is the reserve currency for most of the world- and the currency used for most international business deals.
What is the best safe asset?
While no asset is 100% safe, US Treasury bonds and securities are widely considered as safe as they come. Money market mutual funds are also considered safe choices in 2023.
What asset never loses value?
Assets that are unlikely to lose their value include art, diamonds, land, and collectibles. You generally can’t depreciate these types of asset classes.
What is the safest investment with the highest return?
Every investment has an element of risk- usually higher risks mean higher returns. Generally speaking, the investments considered safest while still offering potentially high returns are fixed-indexed annuities.
A fixed-indexed annuity is a type of insurance product for long-term, tax-deferred savings. They are based on the stock markets index performance- but with more protection against losses than average bonds.
There is still risk involved- more so than with most safe haven assets- but the potential for returns is a little higher.