In the financial world, a safe haven asset is an investment that tends to hold its value during adverse economic and financial conditions: from market crashes to down cycles, from economic crises/recessions to periods of high volatility. The aim of such investments is therefore not so much to generate returns as to preserve capital. Safe havens are often an essential part of a properly diversified investment portfolio.
Protection against inflation
A very important function of safe haven assets is to protect capital against inflation. The intrinsic value of an asset means that it tends to appreciate in the face of a weakening of the purchasing power of current currencies. However, not all safe haven assets are equally effective in protecting against inflation, and their inclusion in portfolios for this purpose should be carefully considered.
Typical examples of safe-haven assets
- Gold. It is the quintessential safe-haven asset, with a recognised intrinsic value that allows it to appreciate over time; its drawbacks include some price volatility. Generally speaking, gold belongs to the broader category of precious metals, along with platinum and, to a lesser extent, silver.
- High quality government bonds. German government bonds and US Treasuries are two examples of securities that can count on a very solid guarantee, namely that the issuer is a government with excellent economic credentials and that the possibility of default is extremely remote.
- Strong currencies. As with government bonds, there are currencies that can rely on a solid economy and a monetary policy that keeps devaluation in check, making their currency a safe-haven asset: one example, besides the US dollar, is the Swiss franc.
- Real estate. Property, especially if it is of a certain value, tends to appreciate over time and in many cases represents a store of value. During the long period of low interest rates, for example, prices have risen. However, caution is advised: compared to other safe havens, they are far less liquid; just think of the costs of liquidating a property and the various stages involved in putting it on the market for sale.
- Precious objects. Some experts also consider certain alternative investments, such as works of art, jewellery, collectors' items, etc., to be safe havens. In fact, these are assets that require special expertise and involve liquidity risks that are far from negligible.
- Money market funds. From a certain perspective, the movement of investors towards money market funds in times of financial crisis makes them somewhat of a safe haven, sought after by savers for their high liquidity and low risk, but with the risk that the yields on these instruments may not be able to counteract the effects of inflation.
The risks of safe havens
It may seem counterintuitive, but even safe haven assets present a form of risk in their own right. While it is true that their very nature makes them more resilient to adverse periods, their massive presence in a portfolio, particularly during a market upturn, can limit a portfolio's return potential. More specifically, an unbalanced allocation to safe havens at the expense of other assets may not be optimal in terms of an investor's return objectives. Of course, it is possible to change the allocation over time, but these operations a) usually require the expertise of a professional and b) should be carefully considered based on the costs involved.
Read also:
Why does it make sense to diversify your investment portfolio?
Inflation, stagflation and deflation
Alternative investments: risks and advantages
