What is a Safe Haven
A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. However, what appears to be a safe investment in one down market could be a disastrous investment in another down market, and so the evaluation of safe haven investments varies, and investors must perform ample due diligence.
BREAKING DOWN Safe Haven
A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility. Most times, 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 most investments falls steeply. While such systemic events in the market are unavoidable, 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.
There are a number of investment securities that are considered to be safe havens. Some of them include:
- Gold: 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 tend to pile their funds into gold, which drives up its price due to increased demand. 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 serve as safe havens for investors.
- Treasury bills (T-bills): These debt securities 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 considered to be 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.
- Swiss franc: In the forex market, 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, low-volatility capital market, virtually no unemployment, high standard of living, and positive trade balance figures. The country’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 ill-gotten funds.
- Defensive stocks: Examples of defensive stocks include utility, healthcare, biotechnology, and consumer goods companies. 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.
- Cash: 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.
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, as an asset that is considered a safe haven in a downturn may not necessarily be a good investment when the stock markets are rising.