In the past few weeks, the US Stock Market has had some crazy days. Although the market is well above its low of December 24th, 2018, it is important that we talk about safe haven investments. Safe haven investments are typically the assets that appreciate in value when there is a stock market selloff. Let us talk about these investments today.
- Cash: Cash is king. Cash is the best way to converse your principal. As long as you are holding onto your cash, you are not making any losses associated with the market downturn. When the market turns negative, a lot of people get out of the stock market and sit on cash. Cash is not the best approach for long time investing since inflation will eat into its value. So, during a volatile market, where could you invest your cash to get a better return?
- Defensive Stocks: Cash can be invested in defensive stocks. These stocks are in the healthcare, utilities, or consumer staples sectors. Defensive stocks appreciate in value because investors know that regardless of the market cycle, people are going to get sick, use water/electricity, and consume food, beverages, tobacco, and household items. Examples of defensive stocks are companies like: Johnson & Johnson (JNJ), Altria Group (MO), Coca-Cola (KO), Pfizer Inc (PFE), NextEra Energy (NEE), etc.
- Government Bonds: Government bonds appreciate in value when the stock market drops. This makes sense because people are moving away from a volatile stock market to a stable investment. Usually during a market downturn, investors choose to direct their retirement contributions towards zero risk investment such as government bonds. This is why bond prices increase (and bond yield drops) when there is fear in the stock market.
- Currencies: Historically, Swiss Franc and Japanese Yen are the two biggest safe haven currencies. In other words, when there is unrest or uncertainty in the market, investors flock towards Swiss Franc and Japanese Yen. Furthermore, when investors want to close out their currency carry trades, they would have to buy back their francs or yens. Typically, during a downturn in an economy, interest rates would drop in order to stimulate the economy. As interest rates drop, the interest rate differential between currencies would not generate a profit – forcing investors to close their carry trades. This causes the Franc and Yen to appreciate in value.
- Gold: Fear and the prices of gold go hand in hand. The greater the fear in the stock market, the higher the prices of gold. Since there is only limited amount of gold, as the demand for gold increases, the price for gold increase as well.
Hope you learned a little and found this blog post helpful. We talked about 5 safe haven investments – Cash, Defensive Stocks, Government Bonds, Foreign Currencies, and Gold. These safe haven investments could protect you from market downturns. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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