What Is a Safe Haven?
A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence. Investors seek out safe havens in order to limit their exposure to losses in the event of market downturns.
However, assets that are deemed safe havens can vary depending on the specific nature of the down market. So investors should perform ample due diligence to pinpoint the right safe haven for their needs.
- Safe haven investments offer protection against market downswings.
- Precious metals, currencies, and stocks from particular sectors have been identified as safe havens in the past.
- Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven approach other than portfolio diversity.
Understanding Safe Havens
A safe haven investment can diversify an investor’s portfolio and may be beneficial in times of market volatility. Often, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession, when the downturn of the market is prolonged. When the market is in turmoil, the market value of many investments can fall steeply.
When such systemic events occur, some investors look to buy safe-haven assets that are uncorrelated or negatively correlated to the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.
Examples of Safe Havens
A number of investment securities are considered to be safe havens.
For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government.
Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs that lingers for a while, investors may decide to pile their funds into gold, which drives up its price.
Also, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars. Other commodities, such as silver, copper, sugar, corn, and livestock, are negatively correlated with stocks and bonds and can also serve as safe havens for investors.
Treasure bills (T-bills) are debt securities that are backed by the full faith and credit of the U.S. government and, hence, are considered safe havens even in tumultuous economic climates. T-bills are also seen as risk-free, as any principal invested is repaid by the government when the bill matures. Investors, therefore, tend to run to these securities during times of perceived economic chaos.
Regardless of the state of the market, consumers are still going to purchase food, health products, and basic home supplies. Therefore, companies operating in the defensive sector will typically retain their values during times of uncertainty, as investors increase their demand for these shares. Examples of defensive stocks include utility, healthcare, biotechnology, and consumer goods companies.
Arguably, cash is considered the only true safe haven during periods of a market downturn. However, cash offers no real return or yield and is negatively impacted by inflation.
Some currencies are considered safe havens. In volatile markets, investors and currency traders may seek to convert holdings of cash into these currencies for protection.
The Swiss franc is considered a safe-haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc usually faces a strong upward pressure stemming from increased foreign demand. Switzerland has a large, safe, and stable banking industry, a low-volatility capital market, virtually no unemployment, a high standard of living, and positive trade balance figures.
Switzerland's independence from the European Union also makes it somewhat immune to any negative political and economic events that occur in the region. Incidentally, Switzerland is also a tax haven for the wealthy, who take advantage of the country’s high-security and anonymous banking features to evade taxes and hide potentially ill-gotten funds.
In addition to the Swiss franc—and depending on the particular challenge the market is facing—the Japanese yen and the U.S. dollar (USD) are also considered safe-haven assets. Often the U.S. dollar is a default safe haven for companies facing any domestic currency uncertainty due to the fact that it is the world's reserve currency and the denomination for many international business deals.
In a year as tough on equities and bonds as 2022, Morgan Stanley noted that the U.S. dollar played its safe-haven role as expected and helped to diversify portfolios as a result of its negative correlation with global equities. In fact, the investment banking firm pointed out that the safe-haven dollar's power to diversify had even increased as the 120-day correlation between the USD and U.S. stocks reached its lowest point since April 2012.
Real estate such as a home and Real Estate Investment Trusts (REITs) can also make good safe-haven investments.
The assets listed above are not guaranteed to maintain their values during periods of market volatility. Furthermore, what constitutes a safe haven changes over time. For example, if an entire economic sector is performing poorly, but one company within that sector is performing well, its stock could be considered a safe haven.
Investors should carry out due diligence when looking to invest in safe havens. An asset that is considered a safe haven in a downturn may not necessarily be a good investment when the stock markets are rising.
Are Safe Havens Good for My Portfolio?
They can be one of the ways that you can diversify your portfolio to protect against risk. Safe havens offer stable returns during unstable times. Though their low risk comes with lower potential returns, they can provide stability when high risk investments stumble.
How Does Inflation Impact Safe Havens?
Inflation erodes the purchasing power of investments, even safe havens. Of particular concern would be a rising inflation rate concurrent with a drop in investment account value. Even though safe havens may not drop as much as some other investments, they still suffer from inflation's power to eat away at value.
Is a Safe Haven Worth It?
It depends on what you want in an investment. A safe haven is a lower risk (lower return) investment that can help diversify a portfolio and offset to some degree the greater risk of investments that offer the potential for higher returns. Having both types of investments makes sense for many investors.
The Bottom Line
Safe haven investments can be a smart choice for many investors. However, it's important to understand that while safe havens can offer stability and even increasing value during market downturns, they can also provide less of a return during periods of market strength, due to their lower risk.