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Understanding Safe Haven With Examples


June 12, 2020
Understanding Safe Haven With Examples

During economic downturns, when market instability is prolonged, a trader’s investment portfolio is exposed to a high risk of losses. As a result, investors look for securities that are negatively correlated or negatively correlated to the general market.

This way, traders are cushioned from experiencing massive losses when other security markets fall. Generally, the uncorrelated assets, also known as safe-haven investments, will continue to increase or retain their values when the rest of the markets experience economic turbulence.

This article discusses what you should know about safe havens for investors, highlighting examples of some of the best assets available in the market.

What is Safe Haven?

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A safe haven is defined as a high-security asset or investment that is anticipated to retain or increase its market value during an economic recession. The purpose of a safe haven investment is to limit a trader’s exposure to losses when there is market volatility or uncertainties.

Traders are recommended to add at least one to their portfolio before they can start risking their investments. However, what appears to be a safe haven in one market could as well be a risky investment in another market.

Traders must, therefore, exercise due diligence when adding an asset to their investment portfolio.

How Does a Safe Haven Work?

Is a fundamental tool for diversification, and it is beneficial during adverse economic events. Typically, volatility in a market is experienced for a short duration. However, there are times when an economic downturn is prolonged longer than usual, resulting in a decline in the value of multiple securities.

Fortunately, safe havens are either negatively correlated or entirely uncorrelated to the trends of the general market. This means that while stock markets continue to depreciate, safe havens will either experience a spike or retain their market value.

Characteristics of a Safe Haven Asset

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Most of them exhibit specific characteristics that define them as the antidotes to a market recession and economic downturn. Some of these characteristics include the following;

• Liquidity

Even with slippage in other security markets, it is easy to open and close a position for a safe haven at a competitive price. Trading safe-haven securities at the initial market price translate to high profits while prices continue to fall further.

• Limited Supply

When the demand for an asset is outpaced by its supply, then it is exposed to a potential risk of losing its market value. These assets are scarcely supplied, and its value will still be high even with increased demand.

• Sustained Demand

The demand for them is unlikely to be affected in the future. This is because a true safe haven cannot be outdated or replaced in the foreseeable future.

Safe Haven Examples

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Some of the securities that are considered to be true safe havens include the following;

1. Gold

The yellow high-value metal is considered to be the main safe haven available in the market. The precious metal is rarely influenced by central bank decisions, banking policies, and other economic news.

Notably, the supply of this safe haven is not manipulated by printing, as is in the case of fiat currencies. Due to the metal’s ability to retain value in adverse economic times, traders tend to tie their investments in it.

2. Defensive Stocks

These are shares held in companies that deal in goods and services in specific sectors, including healthcare, food, beverages, consumer commodities, and consumer staples. A defensive stock is considered to be a safe haven asset following the constant demand linked to it, even in times of economic instability.

For example, the demand for food and beverages has continued to grow amid the recent coronavirus pandemic.

3. Cash

Although real money does not offer any real yield or return, it is considered to be the most authentic safe haven. For individuals looking for a safe haven with zero returns, then real money is the ideal option.

4. Safe Haven Currencies

There are several currencies that retain their value during periods of economic and market uncertainties. These currencies are known as safe-haven currencies, and they include the Japanese Yen, the US dollar, Swiss Franc, and the Euro.

Although there are disputes on their capacity to retain their value in an economic crisis, these currencies have, over time, proven to be sufficient safe havens.

5. Government Bonds

Government bonds, such as the UK Gilts and the US Treasury Bonds, are also considered to be safe havens. This is because investing in government bonds is backed by the government’s full capacity to repay the investment principal upon maturation.

What to Consider When Searching for Safe Havens

Trading These assets should be informed by extensive research and due diligence on the respective assets. This is because what is considered to be safe today is subject to change over time.

For example, companies within the telecommunication and other technological sectors are currently valued as safe havens. This is because their value has continued to grow even with a decline in other markets. Also, various of them might turn out to be very poor investments to add to your portfolio.

Final Thoughts

Security markets are prone to high volatility, exposing an investor’s investment to a high risk of losses. Fortunately, investors can use safe-haven securities to cushion their portfolio against possible losses.

Unlike other securities, safe havens are not influenced by movements in the markets. They tend to retain or appreciate their value, while other markets continue to fall.

If this information was helpful, please share it with your friends on your social media platforms. You can also look out for our other updates on forex trading and related topics by scouring our website.

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