Safe havens: four assets that can reduce risk
There is no such thing as certainty in trading. However, there are some assets investors typically move to when they suspect a market recession is forthcoming. Here are four of the most common.
‘It doesn’t do anything but sit there and look at you.’ So said Warren Buffet about gold. He argues that an investment should have some intrinsic value, and gold arguably has none.
Certainly, gold doesn’t have the practical application of, say, steel or iron. Nevertheless, humans have a special relationship with the precious metal, using it for currency, jewellery and art throughout our history. It feels safe – and investors always flock to it in turbulent times. Its value skyrocketed in the last three major stock market plunges in 2000, 2009 and 2011. When hedging against market volatility, it can be a shrewd move to put part of a portfolio into gold.
Government-backed bonds are a no- brainer for investors looking to play it safe. Issued by governments to finance public spending, bonds give investors a secure place to keep their money while earning fixed-rate returns. The default risk with bonds from the US Treasury for example is negligible, due to its ability to print money or hike taxes should it have liquidity problems.
Return on investment is typically superior to savings accounts, though usually still modest when inflation is considered.
In the face of an oncoming economic calamity, the instinct is often to abandon the stock market entirely. In fact, there are certain ‘staple’ industries – think utilities, energy, household products – whose fortunes are likely to weather market fluctuations better than others. Better still, these companies earn the name ‘dividend stocks’ because they pay regular, predictable dividends to their shareholders. Investing in mutual funds linked to these kinds of stocks is a good way to diversify a portfolio while keeping some skin in the stock market.
Cash is never a good long-term investment, but it adds liquidity to a portfolio that can be very useful in the short term. A market crash will present an opportunity to avail of rock-bottom prices and being cash-rich allows investors to move quickly. Thus, the phrase ‘cash is king’ was coined in the wake of Black Monday in 1987. Furthermore, returns will be limited when investing at the high end of the market, while exposure will be high if it crashes. Cash, on the other hand can always be invested if prices come down. Regardless, most financial advisors recommend setting aside three-to-six months’ worth of savings for an emergency.
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