Safe Haven Investing

Safe Haven Investing

During a storm, we seek shelter. Things are no different with our investments – when there is a financial storm brewing, investors seek shelter in assets, what are commonly called:  safe haven investing. Safe haven investments are investments that are expected to retain or increase its value during times of market turbulence. This article takes a look at some of the safe havens in each asset class.

Safe Haven Investing

Before we dive into the need for safe haven investing, a couple of things need to be stated. It is important to keep in mind that these safe haven investments are temporal: what is considered a safe haven at one time may not necessarily be true during a different time period. This is because each crisis is different; and the same investment may not qualify (although it might) as a safe haven during a financial crisis and then later during a war. What qualifies as a safe haven? In times of instability, the investments as stated earlier – need to retain value at the very least, if not increase in value. There are safe havens in each asset class although investors tend to flock to one or two during times of instability.

Ideally, these safe haven investments have low or no correlation to the rest of the portfolio. A correlation is a statistical measure of how two securities move in relation to each other. For folks who are unaware, the correlation is indicated by numbers in the range between -1 and +1 (usually listed as Beta on financial websites). A correlation of +1 implies that one security moves perfectly in-sync with the other security. A correlation of -1 implies that security moves perfectly in-sync but in the other direction. A value of 0 indicates there is no correlation between the two securities. So, for e.g., if we pick the Apple Inc (AAPL) stock, it has a correlation/beta value of 0.94 according to Google Finance. This means that the stock has a strong correlation to the overall stock market.

Now, onto the safe havens in each asset class.

Commodities: Gold

Gold is the grand daddy of safe haven investments. Gold has remained the go-to commodity as a safe haven for the longest duration. Whether a country goes through financial crises, recessions, famines, currency collapse/inflation, war or any other form of instability, gold has stood the test of time and survived as a hedge and safe haven for investors. There is a good reason for this: mankind has always been fascinated by the shiny metal and has used it as a currency of real value. There is limited quantity of gold available on Earth and while prices can be manipulated by one country’s central bank, the overall manipulation reach is limited on a global scale. I have discussed in detail about investing in gold. See article here and here.

Looking for alternatives to buying gold bullion? Check out these options.

A note about current effect on gold. The price of gold is closely tied to the currency markets and the US$. Gold has been falling in US$ terms and may not make much of a sense for US investors to jump in right at the moment (although its always a good idea to hedge, since we never know when the next crisis comes around the corner), but gold as an investment has done very well for investors in other countries over the years (or US investors who invest using different currencies). This is because the US$ is strengthening by leaps and bounds against all other pair-trade currencies and pushing the price of gold down in US$. The value of gold is still rising well in other currencies. For an overview, check out the returns for gold as an investment, courtesy of GoldPrice.org

Gold Performance

Gold Performance in Various Currencies

Currencies: Swiss Franc

The Swiss Franc (CHF) has been the go-to safe haven in the currency market. Switzerland is a stable, politically neutral, established and financially stable country that has withstood crises after crises. The Swiss Franc held up well during the world wars and has remained well insulated from international instabilities. For this reason, the CHF is regarded as the most stable in the currency markets. However, as a sign of the times, even the CHF has seen some intense volatility lately as the Swiss National Bank decided to remove its three-year-old currency peg to the Euro in Jan 2015. The currency stabilized after the initial volatility and is now on par with the US$.

Other safe haven currencies are: US Dollar (USD) and Japanese Yen (JPY).

Bonds: U.S. Treasury Bills

Lending money to the US government is considered one of the safest investments. The US-T bills, as they are often called, are short-term debt obligation backed by the full faith of the US government with a maturity of less than one year. The T-bills are sold in denominations of $1,000 up to a max of $5M and commonly have maturity dates of 1, 3, or 6 months. This is usually a great way to park money for a short duration, but investors should stay vigilant as majority of retail investors do not buy bonds directly – which means you are guaranteed a rate of return and you get your full principal amount back. Investors usually tend to buy bond funds (either via mutual funds or ETFs), which lose value in rising interest rates environments.

Equities: Utilities

Majority of retail investors focus on equity investing to build a portfolio and grow their nest eggs, and from time to time the equity/stock market gets out of hand with high valuations and investor sentiment driving different sectors into bubble territory. One sector that stands out as a safe haven in equities in times of turbulence is: Utilities. The utility sector is defined as a category of companies that operate in electric, gas, and water services, and form the basis of a community’s infrastructure. The utilities sector can be affected heavily due to their high debt load during liquidity crises or change in interest rates, but due to the regulated nature and the constant cash flow seen by the companies, utilities are considered a safe haven investment.

A close second in equities is the Consumer Staples sector that can qualify as a safe haven. These are companies that operate in their primary lines of business in food, beverages, tobacco, and other household items. These companies have demonstrated a non-cyclical nature making them relatively safe.

Conclusion

Safe haven investments are expected to retain or increase its value during times of market turbulence. It is important to remember that safe have investments may not be universal and change from time to time. In addition, investors need to pay attention to the the correlation aspect in order to avoid a faulty pick. There are different investments that are considered safe haven depending on each asset class, of which some are listed in this article. Remember: no matter how confident you might consider an investment to be safe, the reality is that there is no guarantee. Safe haven investments themselves are never completely 100% safe. The best option is to own a diversified investment portfolio with various components that can weather any storm and provide stability.

Further Reading:

14 thoughts on “Safe Haven Investing

  1. Safe heavens are indeed a useful part of any portfolio. For me, they make sure I sleep well at night. That is why i have permanent safe heavens that are part of my portfolio.

    Next to that, I have some gold that I added toy investments. It is supposed to go up when the markets fear goes up. Lets wait and see what/when this happens.

    I yet have to consider utilities as safe heaven. The thought has crossed my mond more recently… As an index investor, I am thinking to add some specific stock/tracker that move more smoothly than the markets.

    • Thanks for sharing your thoughts, AT.

      Its always a good idea to have part of your portfolio in some permanent safe havens. The only exposure I have to gold is via a mining company – which has lost half its value over the years, but I am still holding it, as there is nothing wrong with teh company and it continues to make money.

      Utilities are also something that I have been moving into over the past year. I liquidated my utilities ETF since I did not like some of the companies in that ETF and now own companies that I am happy to hold thru thick and thin.

      Happy investing
      R2R

  2. I have been banging the gold drum for awhile now… When people get scared, there is no better place to be. Physical gold is a store of value and the only form of money that carries with it no counterparty risk. All fiat currencies are debt instruments, and it should be obvious enough to everyone that the entire world has taken on too much debt…

    Everyone is out looking for bargains, but there is absolutely no better bargain out there than gold stocks at this time (an even better deal than compared to physical gold). The most undervalued asset class of all is gold stocks. That sector has been massacred, and I am certain, before long, gold stocks will decouple from the rest of the broader markets and start their climb up just as the bear market in general equities takes full flight… People will start to catch on and this will be the ultimate fear trade to not only preserve wealth, but to profit from the inevitable collapse (which has already started to accelerate in many countries). It is not far fetched to suggest that these gold stocks can climb up 3x, 5x, or even 10x as gold breaks out of its 4-5 year wretched bear market.

    Most investors don’t understand gold and won’t bother to. It’s a barbarous relic. And they really won’t pay any attention unless things get too a level as bad or worse than 2008. People are reactive, not proactive… But luckily for anyone who is getting the hint early, there’s still PLENTY of room left on this train…

    Cash, physical gold, gold mining stocks. That’s how to survive this storm…

    • I completely agree with you. Gold mining companies are extremely attractive right now….but I think the only thing stopping them from taking off (and gold itself) is the strong US$.
      As it stands, there is no one to take down the US$ from the throne. Euro was getting to a point where it could give US$ a run for its money, so to speak, but lately, with the Euro credit crisis, migrant crisis and the lack of political will between the countries when it comes to these crises has brought the question of Euro’s future into question. So, ppl are left nowhere to go except the US$. But if theres an alternative, I wonder if ppl would adopt it readily.

      Anyway, I am looking at adding some gold and/or gold mining companies to my portfolio this year. Dont think I will sell my other companies, even though I know theres a crisis coming. I took a long hard look at all my holdings in the last couple of months and I am happy to hold them through the next recession/crisis.

      Best
      R2R

  3. Another safe investment is tax free bond funds. I’m considering adding one to my portfolio. They pay monthly and are free of federal taxes and state taxes if you live in the same state (can be subject to alternative minimum tax).

    • Are you referring to Muni bonds? Its something that Ive heard about and I think its more popular in the US than outside. I understand some cities have defaulted lately, so isnt that a cause for concern?

      R2R

  4. Hi R2R,

    Good post. I’m interested in this point of view (gold etc) because it seems a strange to buy it. When’s the right time to buy? When it’s already risen (buy high?) When do you sell, when the economy/share market has recovered (sell low?). Are you buying actual physical gold that you can touch, or a business?

    How long do you hold any of these ‘safe havens’?

    It just strikes me that, as the often quoted shares growth over time (eg 10% year since choose-a-date) includes all the bad years too. If you had bought during 2009/2010 then you’d be sitting on big gains, the best time to buy is when they’re low, not medium priced or high priced right? Take the dividends through the rough patch and eventually your purchase price will look cheap. You just have to choose the right businesses (growing ones or good dividend payers (AVA aristocrats).

    If anything, cash is the ultimate safe haven because you aren’t relying on anything else (not a Govt, not a business, not a commodity price) and most of our countries have some kind of guarantee up to a certain cash balance in a bank account. It earns interest. It’s not losing any capital. In my eyes, it’s sitting there waiting to be utilised for a great-value share buy.
    The day cash isn’t useful in USA/UK/Canada/Australia etc and isn’t worth anything is either we’ve achieved a Strek Trek type Utopia where money isn’t needed, or the world is in anarchy like The Walking Dead / any other end-of-the-world situation. In that case, there isn’t a bond, gold, property, share, that will be worth anything.

    Tristan

      • Cash can be a safe haven, but you have inflation eating away at things. Our financial systems seem to have figured out that the solution is to change the definition of inflation – where food and energy prices arent included. Energy prices have crashed, but that still doesnt seem to be making a difference in our bills as the energy companies are taking a bigger cut. Same goes with all our other bills.
        But by far, the biggest increase has been our food bills – which are shooting thru the roof. Our CAD$ has fallen 15% over the past year and our money doesnt buy as much as it used. This makes growing our savings that much more important. In the midst of all these asset bubbles, I am considering going to safe haven atleast as part of our portfolio.

        R2R

  5. B says:

    Hi R2R

    It’s hard to quantify where is the safe haven today.

    Gold? US Dollar? Bonds? I just read a report that says none of these. Hermes bag is the choice for their version of safe haven. 🙂

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