A safe haven is a term that refers to an investment that is anticipated to maintain or increase in value during times of economic downturn. Such investments are believed to be a safe option for investors, as they are not correlated to the economy – meaning that a financial crisis would not reduce the value of the investments. Therefore, safe-haven investments offer more protection and diversification in investors’ portfolios, which is advantageous if the market is volatile.
Trade wars, natural disasters, the Global Financial Crisis in 2008, and the COVID-19 pandemic are all events that prompted investors to buy safe-haven assets in order to mitigate their losses from a potential stock market crash. Investors looked to purchase “safe” assets, such as gold, treasury bills, government bonds, and defensive stocks.
Characteristics of a Safe Haven Asset
High liquidity: Investments need to be able to convert to cash easily.
Limited supply: The asset’s supply must be less than its demand in order to maintain its value due to the scarcity of the asset.
Continuous demand: The asset should be able to maintain high demand in the long-term, which makes the asset hard to replace by another investment.
Endured performance: The asset must continue to provide good use for the long term in order to keep up demand. For example, metals are a type of safe-haven asset that is continuously used for infrastructure.
Permanence: The asset does not decline in quality. It does not rot or decay.
Examples of Safe Haven Investments
Gold is often regarded as one of the most popular choices to invest in during times of economic instability. Historically, the value of gold increased significantly during the 2008-2009 Global Financial Crisis. It gave investors a return of approximately 20% between 2008 and 2009.
The high liquidity associated with gold makes it an easy investment for individuals to buy and sell. Unlike other assets, gold is also an important safe-haven investment because it is a physical commodity, so it will not be impacted by economic factors, such as currencies, interest rates, and inflation. Therefore, investors see gold as a safe investment because it can still retain its value even in the midst of inflation.
A government bond is a fixed-income financial instrument. Bonds are issued by the government or corporations when they want to raise more capital. They are similar to a loan in the sense that an investor would lend their money to the government, and the amount would be paid back by the government at the maturity date.
A government bond is a safe-haven asset because it is considered to be risk-free and has low volatility. This is because investors will be paid back the principal, along with any outstanding interest at the date of maturity. Investors also prefer to invest in government bonds because the government is considered to have high creditworthiness, which also provides more security and confidence for investors.
The U.S. dollar, Japanese yen, and the Swiss franc are noteworthy currencies that investors consider a safe investment. The currencies are attractive investments during an economic downturn because of their high liquidity, independence from other countries, the country’s stable political system, and also securing the support of a country with positive economic growth expectations.
There is also a tendency for foreign countries to store the currencies in their reserves, which indicates the security in holding such currencies and the high confidence in the creditworthiness of the currency’s country of origin.
Defensive stocks refer to shares of companies that sell products that are considered to be necessities. They are part of sectors such as utilities, healthcare, consumer goods, and food and beverages.
They are safe-haven investments because there will always be a constant level of demand for these products regardless if there is economic turmoil. For example, people will still need access to gas, water, electricity, and healthcare, even when the economy is performing poorly.
If you would like to gain valuable skills that can help develop your journey in corporate finance, CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program. CFI also offers a variety of courses and related readings for you to continue learning about topics related to investing:
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