In times of turbulence and uncertainty, it is helpful that traders have several assets to fall back on to keep their investment funds safe – or as safe as possible, anyway.
As stocks and shares fall and rebound, as international currencies crash and rise and as cryptocurrencies just do their thing, some assets tend to retain their value regardless of the political and economic conditions around the world.
Of course, so-called ‘safe haven’ assets aren’t completely bulletproof, and it would be a foolish trader that barges in blind and invests in a downturn – in unforeseen scenarios likes the coronavirus pandemic, nothing is safe!
But talking in general terms, here’s a quick guide to safe haven assets, some examples and how you can trade them to maximise your return.
What is a Safe Haven Asset?
Firstly, let’s reconfirm what a safe haven asset is.
These are commodities that, historically at least, tend to hold their value in times of uncertainty and, as such, they are used by investors to limit their exposure to volatility.
Safe haven assets exist beyond the grip of economic or political conditions, and so some will even gain value in the darkest of situations.
Examples of Safe Haven Assets
As mentioned, no asset is entirely ‘safe’ and guaranteed to keep your portfolio in good order come what may.
However, history dictates that some commodities are safer than others, and the examples below are where traders tend to turn when there is global uncertainty or an economic depression.
Gold, the classic safe haven asset, tends to hold its value at all times.
It isn’t harmed by economic factors like changes in interest rates or inflation. While it is a physical asset, its value does not diminish because its quality does not tarnish.
Most traders use gold as a kind of insurance policy, pivoting to it in times of uncertainty when stocks and currencies are vulnerable to a downturn.
Because most traders invest in gold in a downturn, its price has a habit of increasing – a recession-proof way of making a handy return on your investment.
- Government Bonds
In the UK they are known as government bonds and in the USA as treasury bills, but either way, these top-level assets are a pretty secure way of investing in volatile conditions.
These bonds are basically a source of income for the government, so they hold their value and also pay out interest dividends periodically.
At the end of their maturity term, you can ‘cash out’ and (hopefully) you will have made a profit over the course of their lifetime.
Typically favoured in prolonged downturns, traders have confidence in government bonds because they are – more or less – guaranteed at the highest level.
- Defensive Stocks
So-called defensive stocks are those that are negatively correlated to the economy.
So, stocks in healthcare, in defence technologies, in consumer goods and other ‘essential’ industries tend to be recession-proof, because customers will always need their essential supplies.
The definition of defensive stocks incorporates anything where demand will not decrease even in the darkest of times.
Okay, so not all global currencies are safe havens – far from it – but the history books dictate that some hold their value independently of the overall economic picture.
The Swiss Franc is one example. Switzerland benefits from a stable government, a compliant society, a strong economy, an agreeable taxation environment, an outstanding healthcare system and a large number of big-money companies who trade under the ‘defensive stocks’ banner.
For many of the reasons outlined above, the Japanese Yen is also considered to be something of a safe haven.
How to trade Safe Haven Assets
When you are at the top of your trading game, have built some experience and dedicated yourself to enhancing your learning of the trading game, knowing what to do with safe haven assets will come naturally.
From time to time, there will be economic instability – be it globally or specific to individual countries, and the sensible course of action is to batten down the hatches in gold, bonds and the like.
The coronavirus pandemic is an excellent example. The US stock exchange flatlined at the start of the outbreak, and at that point, many smart traders would have pivoted into gold, etc.
The result? Three months later they would have turned a profit, rather than staring down the barrel at a bunch of devalued shares.
One of the main mistakes made by amateur traders is doing too much in the market; rather than protecting their portfolio by moving into safer assets and sitting tight. In the current climate, this is a lesson that all traders need to learn.