As its name suggests, a safe haven investment is one considered ‘safe’ during times of great market turbulence. When the stock market is going through a volatile period then channeling investments elsewhere to ride out the storm might be considered.
A safe haven investment would generally be expected to retain or possibly increase its value, although the emphasis is very much on ‘holding what one has’ as opposed to expecting significant gains.
Haven and hedges – are they the same?
You may think ‘safe haven’ and ‘hedging’ is the same thing, but there is a subtle difference.
A hedge asset is unrelated to the performance of stocks and bonds on average whereas a safe haven is an asset unrelated to stocks and bonds when the market crashes.
Gold – the best safe haven?
This precious metal would appear to tick all the boxes for the ideal safe haven investment:
- It’s a physical asset so can’t be printed and thus have its value changed like currency
- There is only so much gold in existence – only around 165,000 tonnes of it have ever been mined
- It performs well in a crisis with many investors flocking to it when markets are volatile.
Options for investing in gold include buying Kruggerrands, ‘New Gold’ and gold shares.
These may go under different names in other countries so may be known as ‘gilts’ or ‘Treasuries’, and have proved popular in South Africa when the country’s growth outlook is suffering and investors come out of stock investment.
What happens here is that governments raise money from investors by pledging to pay a guaranteed amount of interest after a set time (the time varies depending on the bond). They could be described as a type of IOU from the government to the investor.
They’re considered a safe investment as there’s less chance of a whole country going bankrupt compared to an individual company. Ironically, as more people invest in them in times of turmoil, the amount you receive lowers – but this is of course preferable than losing larger sums on crashing stock markets.
While an overall ‘going into safe haven mode’ might be considered, a variation of this investment strategy could be to combine this with some leveraged lower investment investing such as CFD trading (Contract for Difference).
The advantage here is that a smaller deposit gives you a larger market exposure and you don’t actually own any assets when investing in this way.
Certain currencies are considered safe havens, but care must be taken as the country concerned will likely step in if too much investment is made in their currency thus making it potentially too strong.
The Swiss franc is a popular currency for safe haven investing, and some analysts often advocate the dollar although this may depend on specific events. For example, for a while its value may be affected by uncertainty in the markets in the run up to and election of the next US president in November.
One option is to sell up completely during periods of uncertainty and simply convert everything into cash. This is more common when the markets are specifically volatile and an end isn’t in obvious sight.
Safe haven drawbacks
In general, as discussed earlier, safe havens aren’t likely to yield high returns so will likely prove a less attractive investment vehicle when the markets rise. That said, as a ‘safety first’ strategy they are a viable common investment option.