What are safe-haven assets?

What are safe-haven assets?

Safe-haven assets are investments that typically retain or gain value during economic downturns. Investors may seek out safe-haven assets during periods of market volatility.

Safe-haven assets, explained

When there is a widespread shock or calamitous event in the world – think the 2022 Russian invasion of Ukraine, the COVID-19 pandemic or the global financial crisis of 2008–09, to name a few examples – investors begin to fear a stock market sell-off. A flight to safety often ensues as a way for investors to mitigate potential losses in their portfolio.

These safe-haven asset types are often used by investors to limit exposure to market, economic or political instability. However, diversification does not guarantee a profit or protect against a loss.

Safe-haven assets, such as government bonds, gold and so-called defensive stocks, are often relied upon to retain value amid market turbulence.

Safe-haven assets typically have certain characteristics that may help them retain value:

Examples of safe-haven assets

Popular safe-haven assets have generally remained the same over time. However, a safe-haven investment that works well in one downturn may not perform as well in another type of downturn.

Precious metals

Gold in particular is thought of as a classic safe-haven asset. Gold and other precious metals are physical commodities, and their prices are often influenced indirectly by monetary policy decisions made by central banks. Economic factors, like currencies, interest rates and inflation, can play an important role in precious metals prices. In contrast, the supply of paper currencies can rise or fall depending on how much is issued. For example, the price of gold increased 12.8% in 2009 amid the economic and financial crises as the Federal Reserve ramped up its quantitative easing campaign.

Certain currencies

Currencies that generally maintain stability, such as the U.S. dollar, Swiss franc and Japanese yen, are often considered safe-haven assets. In moments of economic turmoil, investors may flock to these currencies because of their countries' political stability and the currencies' tendency to be highly liquid. They are also considered attractive havens because central banks often hold some of these currencies in their reserves, which can signal confidence in holding such currencies and in the creditworthiness of the currencies’ countries of origin.

For instance, the U.S. dollar has functioned as the world’s dominant reserve currency since World War II. Central banks hold more than half of their foreign exchange reserves in U.S. dollars. As with gold, the U.S. dollar functioned as a safe-haven investment during the global financial crisis of 2008–09 and amid the 2020 COVID-19 pandemic. In both instances, investors bought U.S. dollars, expecting the dollar’s value to hold up through economic turmoil.

Government bonds

Government debt securities, such as U.S. Treasury bills, are a quintessential safe-haven asset because they tend to have low volatility and are regarded by many investors as “risk-free” from a credit perspective. This means that investors have high levels of confidence in the government’s creditworthiness, so they know any principal will most likely be repaid if the security is held to maturity.

Defensive stocks

Defensive stocks are known to maintain relatively stable performance regardless of the current state of the economy. Defensive companies typically make products considered necessities – things consumers will buy even in downturns. That’s why they’re less prone to cyclical effects of expansions and recessions. There tends to be demand for consumer staples, utilities and healthcare – even when the economy is in decline.

Can safe-haven assets turn risky?

As noted above, not every safe-haven asset will hold up across all economic downturns, and none are guaranteed to produce positive returns in all market downturns.

The price of assets like gold is often unpredictable, and it can be volatile even during market crises. Using cash as a safe-haven asset also implies risk, as the dollars or other currency you hold in your account can lose value in the event of devaluation or inflation. It is important to be aware of the risks associated with different financial safe havens. It can be smart to diversify your safe-haven investments so that you are not depending on a single asset to protect your portfolio in a market downturn.

An asset considered a safe haven isn’t guaranteed to be safe during a tough stretch in the markets. For instance, gold did not behave like a traditional safe-haven asset at the onset of the COVID-19 pandemic in 2020. The price of gold followed the general direction of the S&P 500 index lower; gold lost 4.9% of its value on March 12, 2020, while the S&P 500 index dropped by approximately 10%. At points during the pandemic, the Swiss franc strengthened more than the U.S. dollar as a safe-haven asset, even though they both proved to be safe during the global financial crisis of 2008–09.

Investors should consult with a professional financial advisor if they’re unsure how safe-haven assets could fit into their particular portfolios.

Safe-haven assets vs. traditional investments

Part of the reason why safe-haven assets are used to mitigate potential losses when the broader markets experience turbulence is because they can help hedge equity exposure, which carries more risk along with the potential for higher growth.

If you’re concerned about investments losing value, safe-haven assets can help diversify a portfolio, which may help investors feel more comfortable amid market turbulence. Some safe-haven investments like bonds and defensive stocks can also generate income.

However, lower risk also comes with lower reward, whereas traditional investments like stocks carry higher risk and higher reward. Additionally, some safe-haven investments are subject to other risks, such as holding costs or inflation risk. If inflation spikes during a market downturn, you could be left with investments that may be worth the same monetary amount, but that have far less purchasing power.

The bottom line

Markets – and therefore investment portfolios – don’t always go up. In periods of financial crisis or acute market uncertainty, investors may seek out safe-haven assets as a way to weather these downturns. Safe-haven assets behave differently in varying economic environments, and investors can use these types of investments to diversify their portfolios and feel more confident their portfolio is better positioned to weather a downturn. As always, consider discussing adding safe-haven assets to your portfolio with a financial advisor to help ensure it’s aligned with your goals and objectives.

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