The stock market is a balancing act. On one side, the bulls — investors who believe securities will rise — are buying assets, hoping to bank on the growth. On the other side of the coin, bears — those who expect declines in the values of securities — are selling assets.
When the bulls outpace the bears, the market is considered to be a bull market. Stock values rise, and investors on the bullish side start to count their profits.
Every once in a while, the bears take hold. After a bull run, high valuations nearing or at resistance lead to fear among investors. As such, these investors hesitate to open positions or add to current positions. At the same time, downward pressure from the bears starts to take hold, pushing the market into what’s known as a bear market.
During a bear market, significant declines are experienced. It’s at these times that many beginning investors are left with a bit of a conundrum. If they take their money out of the market, their dollars aren’t making any return. On the other hand, if the money is left in, the investor stands to realize significant losses.
But how do you win in a bear market? Through the use of safe-haven investments.
What Are Safe-Haven Investments?
Safe-haven investments are assets that are known to either hold their value or increase in value during times of economic and stock market unrest. There are several different types of safe-haven investments. One that you’re likely familiar with is cash. After all, when you take cash out of the market, the cash will be worth the same amount of money today as it will tomorrow, the next day, and so on.
However, cash only holds its value. Some safe-haven investments actually gain in value when economic and market conditions prove to be turbulent.
The reason some safe havens gain value when the overall market is falling is a matter of one of the most basic economic principles: supply and demand. When the stock market turns bearish, investors race to sell shares, pulling money out of cyclical investments.
Once they liquidate their investments, investors are left with cash. But cash doesn’t gain value, and if you’re not winning, you’re losing. So, investors begin to look for investment options that gain value in bear markets. Given the fact that there are only a few types of investments that do so, demand for those that do skyrockets.
According to the law of supply and demand, when demand rises, either supply must rise or price must rise. Because new safe havens can’t be simply produced, supply of these investments remains finite, leading to increases in prices and, ultimately, gains for these investment vehicles in bear markets.
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Common Safe-Haven Investments
The market is crashing. You’ve pulled some money out. Now where do you turn? There are five common safe-haven instruments investors turn to in bear markets.
1. Precious Metals
Precious metals are one of the most popular safe-haven investments on the market today. Metals like gold and silver are some of the oldest forms of currency. For quite some time, global economies would back their currencies with gold, silver, and other precious metals to provide stability within their economies.
While the golden age of currency is over, precious metals are still great safe-haven plays.
Historically, when economic and market conditions are negative, precious metals gain in value, but to invest in them, you don’t have to buy gold and silver bars (but you can if you want through Vaulted). Paper precious metals, like precious metal exchange-traded funds (ETFs), are available. You also have the option to invest in precious metals mining companies with strong fundamentals, as they will benefit from the price increase in the products they produce.
No matter how you go about it, investing in precious metals is one of the best ways to go about realizing gains in the midst of a bear market.
2. Utilities Stocks
Could you imagine living in a home where lights don’t turn on when you flip a switch, water doesn’t run when you attempt to flush your toilet, and garbage just sits on the curb because there’s nobody to pick it up? Basic utilities are services that the vast majority of Americans refuse to live without, even in times of economic unrest.
As a result, utilities stocks are some of the most stable stocks on the market, not only realizing gains during positive economic times, but also when the economy and market are struggling.
Utilities stocks allow you to have your cake and eat it too. Not only do they tend to grow in value, even in times of economic unrest, but utilities stocks are known to pay some of the highest dividends on the market today. As a result, even if the stock stays flat or sees a slight downturn, the dividends add to the safe-haven protection provided by these investment options.
3. Treasury ETFs
There are few investments more stable than an investment in the United States Treasury. There are several ETFs on the market that invest in the U.S. Treasury, confident that the Treasury is going to pay its bills.
Investing in these Treasury ETFs gives investors access to a wide range of U.S. Treasury bonds that not only pay decent coupon rates, but are more likely to pay investors back than any other bond on the market. As a result, Treasury ETFs are a great way to grow your portfolio in a down market.
4. Treasury Bonds
Treasury bonds take the decisions out of a fund manager’s hands. Instead of allowing a Treasury ETF manager to make your investments for you, you can simply buy Treasury bonds on your own.
Not only is this a great safe-haven investment, it’s a great way to reduce the expense ratio in your portfolio while coming out ahead in a bear market.
Cash is king. All of the safe-haven investment options above are likely to produce gains in a down market, but that doesn’t mean they are guaranteed to do so. That’s why some people use cash as their safe haven when the market crashes.
Sure, cash isn’t going to win any awards for gains. In fact, holding cash isn’t going to lead to gains at all, but it will provide stability.
The cash that you have today, if held in its current form, will hold its face value regardless of how long it sits in your safe. So, some investors are willing to give up the potential to produce gains during a bear market to ensure that there is zero chance of realizing losses.
Tip: Beware of Inflation
It’s important to remember that, if you’re not gaining, you’re losing. Cash does hold its dollar value over time, but it is horrible at holding intrinsic value or buying power. This is the product of inflation.
Think about it; your grandpa was probably able to buy a hot dog, bag of chips, and a soda for under a dollar when he was young. Today, you’ll be lucky to find a bag of chips for under a dollar, let alone a full meal.
Sure, that dollar is still a dollar, but its buying power isn’t what it used to be. So, while cash is a great short-term safe haven, it should not be held for any substantial period of time to avoid inflation-based losses.
Pros and Cons of Investing in Safe Havens
No matter what investment vehicle you’re looking into, there will be benefits and drawbacks to making an investment. Safe-haven investments are no different. There are plenty of great benefits surrounding them to talk about, but there are also some pitfalls that you should consider before buying into them.
Pros of Investing in Safe Havens
Investing in safe havens provides great protection for your portfolio when used properly, but that’s only one of the perks to investing in these beauties. Some of the most important pros to consider when investing in defensive assets like these include:
1. They Protect Your Portfolio in Bear Markets
By their very nature, safe-haven investments provide investors with a level of safety when the bears start to take over the market. The overall market is cyclical. As a result, it will ebb and flow with economic conditions.
When the market falls, safe havens not only give you a way to protect your value, but to grow it. That’s invaluable.
2. They Offer a Way to Hedge Your Bets
Diversification is the key to most successful investing portfolios. Safe havens are often used to diversify, hedging risky bets with assets that are likely to head up should those risky bets not pay off.
For example, you might make an investment in a biotechnology company that’s working on developing a cure for AIDS. Because that cure has not been approved by the FDA, the investment is risky. So, you have the ability to hedge that bet by buying utilities stocks, which will add some stability and income to your portfolio.
3. Some Safe Havens Can Generate Income
Some safe-haven investments aren’t just a way to produce gains in value during bear markets; they are also a way to get a paycheck. If you’re looking for both growth and income during tough economic times, you can look to the following asset types to scratch your itch:
- Utilities Stocks. Utilities stocks are known to be some of the highest dividend payers in the market. So, the stability they offer in price will be coupled with income from these high dividend payments.
- Treasury Bonds. Bonds are essentially loans provided by investors. They pay interest in the form of coupon rates. Treasury bonds are highly secure, so their coupon rates will be low when compared to other types of bonds. Nonetheless, the added income is always welcomed in a bear market.
- Treasury ETFs. Finally, Treasury ETFs are made up of Treasury bonds. Therefore, ownership of Treasury ETFs equates to ownership of Treasury bonds and comes with the same form of coupon-rate-based income.
Cons of Investing in Safe Havens
Safe-haven investments are a great way to protect yourself and generate money during a bear market, but it’s not all cake with icing on top here. There are a few drawbacks to consider when investing in safe-haven assets.
1. They Have Slow to No Growth
Safe-haven investments aren’t known for making monumental moves. The reality is that the vast majority of these investments see slow, steady growth. The lack of volatility, or rapid changes in price, is one of the factors that make these investments safe havens.
Moreover, if you use cash as your safe-haven investment, slow growth becomes no growth, as a dollar will never be worth more than a dollar.
As a result, if you invest your entire portfolio into safe havens, you’ll be missing out on the significant gains that could be experienced through investments in other vehicles.
2. They Have Down Times Too
Safe-haven investments are known for relatively slow and steady growth, but that doesn’t mean that they never lose value. Every asset has down times.
In particular, most safe-haven investments experience declines when economic expansions and bull markets are underway. During these times, investors sell out of safe-haven assets, looking to turn a larger profit from more cyclical investment options.
As a result, demand for safe-haven investment vehicles takes a hit. Of course, just as the law of supply and demand suggests that when demand is high, safe haven prices head up, the law also stipulates that when demand is low, prices will fall.
So, safe havens aren’t always safe investments. Timing is everything, even in this category of investment vehicles.
3. Inflation May Lead to Losses
When choosing a safe haven, if you’re looking for growth, it’s important to look for options that grow at a faster rate than inflation. Money isn’t worth what it was years ago anymore, and years from now it will be worth even less thanks to inflation.
On average, inflation happens at a rate of 3.22% per year in the United States, according to InflationData.com. That means every year, your investing dollars need to earn at least 3.22% for your buying power to break even. As a result, if you invest in safe havens that grow at a rate slower than 3.22% annually, you’re losing money — or at least value in your money.
When Is the Best Time to Invest in Safe Havens?
In order to ensure that your portfolio is diversified, there should always be some level of safe-haven investments in your portfolio. How much? Well, that depends on both timing and goals.
In general, it’s a good idea to diversify your portfolio with bonds, using your age as a guide as to what percentage should be invested in bonds. For example, if you’re 33 years old, 33% of your portfolio should be invested in safer investments like Treasury bonds.
As you age, your appetite for risk should decrease. As a result, you should increase your safe-haven holdings, giving you the opportunity to add stability to your portfolio as you near retirement. Nonetheless, at all points, your portfolio should have a good mix of safe-haven investments.
However, at some points, you may want to increase or reduce exposure to these investment vehicles:
- In Positive Economic Conditions: During times of positive economic conditions, investments in cyclical stocks will yield compelling returns. So during these times, you’ll want to reduce exposure to safe havens and take advantage of the gains the market has to offer.
- In Negative Economic Conditions: When economic conditions falter, cyclical investments tend to take a dive. As a result, during economic hardship, it’s time to reduce your exposure to cyclical stocks and take advantage of the stability — and even potential growth — safe havens have to offer during bear markets.
Safe-haven investments have a special place in the portfolios of most uber-successful investors. Sometimes their positions in safe havens are relatively small; sometimes they’re pretty big.
The key is to take the time to do your research. When determining how much of your portfolio to allocate to safe-haven investments, do some reading on the current state of the economy. Also, keep in mind that not all safe-haven stocks are created equal. Some will grow faster than others, some won’t grow at all, and some will fall. Even when investment opportunities are labelled as safe havens, they warrant adequate due diligence.