Safe Haven for Another Choice
Safe Haven is an investment that is expected to retain its principal or increase in value during times of economic unrest and can reduce risk in the event of economic downturns. However, assets are deemed safe havens can vary depending on the specific nature of the economic situation. A good thing is Safe Haven assets are uncorrelated or negatively correlated to the economic recession or during times of distress, and they can either retain or increase in investment value while other assets are falling in value.
Even though Safe Haven investment is quite safe but investors have to learn and understand that asset allocation for investments will be beneficial in times of market volatility.
What are Safe Haven assets?
Gold is a Safe Haven asset that always gains high popularity because gold is a tangible asset that cannot be reprinted like money. The price of gold is not a function of interest rates as its value has been retained from the past. Therefore, during economic stagnation or crisis, the gold prices will be increased due to high demand.
Many people feel insecure to buy gold bars and keep them at home. A solution is to invest in Gold Fund, Gold ETF, etc.
A government bond is a debt security issued by a national government. It is considered safe because the government will pay your investment principal back on the maturity date. That’s why investors tend to invest in this bond when the economy enters a recession.
Although Government Bond offers low returns, it’s highly safe. However, retail investors have a rare chance to buy it so they have to invest through Fixed Income Fund which typically includes government bonds.
A Defensive Stock provides stability to your portfolio regardless of whether the economy is up or down. Most stocks have strong bases, low risk but tend not to offer much growth potentials, such as utility, hospital, or consumer goods.
Besides, Defensive Stock includes dividend stocks that provide consistent returns and stable earnings for 15 or 20 consecutive years, regardless of how the stock market or economy is doing.
Cash is considered the only true Safe Haven during periods of a market downturn. Even though cash offers no real return or yield, and is negatively impacted by inflation, it is safe during a crisis. And when the situation is settled, investors may find ways to invest in other assets to grow returns further.
Some currencies are considered Safe Havens compared to others. In unstable markets, investors and currency traders may try to convert cash holdings into these currencies for protection. For example, the Swiss Franc is considered a safe-haven currency considering the stability of the Swiss government and its financial system. Switzerland has a high standard of living, positive trade balance figures, and almost no unemployment. The country is independent of the European Union so that makes it somewhat tolerant to negative political and economic.
Even though the above-mentioned assets are classified as Safe Havens, it’s recommended to consider the following concerns before determining the best shareholding for investment port.
1. Study and understand each investment asset to minimize the negative impact as Safe Haven returns are not always consistent. For example, during the early phase of the COVID-19 pandemic which affects the global economy, gold prices significantly hit new heights. But once the vaccines are manufactured and the economic vision is clear, gold prices will gradually drop. It means similar types of assets generate different returns even in the same period of economic downturn.
2. Flexibility and adjusting port when economic start having clear direction and becomes less fluctuated. Even though a Safe-haven asset is a safe investment during an economic recession or crisis, it may not be a good investment asset when the economy starts recovering or expanding.
3. When choosing a Safe-haven asset, make sure to consider that returns must be higher than inflation, such as if inflation is at 2% per year, returns should be higher than 2% and over per year.
4. The factor for Safe Haven investment does not depend only on the economic situation but also the age of investors, such as at the young age, risk tolerance is high so they can focus on arranging investment port in high-risk Safe-haven assets like gold, Gold Mutual Fund or Swiss Franc. When getting older, they may lower risk and focus on Gold Mutual Fund and Government Bond.
Studying a variety of asset investments will be a tool for diversification to gain returns, at least outweigh the inflation rate. If you need more in-depth information whether which situation or period of time is suitable for investing in that asset, you may read the analysis or consult investment experts to make a sound judgment.