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.
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$. The value of gold is still rising well in other currencies. For an overview, check out the returns for gold as an investment, courtesy of GoldPrice.org
Currencies: Swiss Franc
The Swiss Franc (CHF) has been the go-to safe haven in the currency market. Switzerland is a stable, politically neutral, established and financially stable country that has withstood crises after crises. The Swiss Franc held up well during the world wars and has remained well insulated from international instabilities. For this reason, the CHF is regarded as the most stable in the currency markets. However, as a sign of the times, even the CHF has seen some intense volatility lately as the Swiss National Bank decided to remove its three-year-old currency peg to the Euro in Jan 2015. The currency stabilized after the initial volatility and is now on par with the US$.
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.
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.
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.
- The Importance of Diversification: Part 1
- The Importance of Diversification: Part 2
- Revenue Diversification