We’ve all seen this blurb on the news, “investors rushing to safe haven’s during economic crises” but what does this mean exactly? Where are investors storing their money during crises, and why? Why don’t people hold onto their money instead of investing it in a “safe haven”? In the following article we’re going to explore the issues that come with economic crises, and why the market behaves the way that it does during these times.
Investments With “Safe Haven” Status
What investments have this status as a “safe haven” and what does it mean? Essentially safe havens are investments that are predicted to retain their value during times of economic downturn. These assets tend to react predictably during these times. Investors see them as a safer way of storing their money during times of market volatility. Those who already have experience in precious metals may see these as the only true safe haven. However, there are numerous examples of safe havens. These include but are not exclusive to; treasury bills, defensive stocks (health care), and precious metals. Cryptocurrencies such as Bitcoin are also being investigated for this status too. But they don’t have the track record that others do and are mostly considered volatile.
Why Not Just Store Cash?
It’s easier to play baseball from the seats so to speak. If you don’t have experience in investing during times of economic downturn (which is likely why you’re reading this article) you may not understand why people just don’t stop investing during these times. One primary reason is inflation, and although inflation tends to carry a small average increase per year, this can add up over extended periods of recession. One only needs to look at the crises in 2008 to see how this could be impactful. This impact tends to most effect those who are looking to retire in the coming years.
For example if you had saved 1, 000, 000 USD for retirement in 2008, and stored this as cash, it would be worth 66, 000 USD less in 2012. Comparatively this seems like a small margin, but this could take a year or two off of someone’s retirement. The majority of people I know wouldn’t be prone to burning this amount of cash, which is essentially what you’re doing if you’re just storing cash.
Investments Have Their Ups and Downs, So What?
If you’re a younger person who has investments, you might see the opportunity in hits to the stock market. And you should. When stocks go down it can be an opportune time to capitalize on a reduced cost of entering the market. But what if you own a house, have a family, and suddenly lose your job? Now you’re faced with supporting a family, paying a mortgage, and trying to cover the costs of any emergencies that may very well arise. If you do need to delve into your investments to help carry you through, you don’t want to sell them at a period of time when they’re worth much less.
This is why so many people keep their investments stored in safe havens in order to be prepared for these times. If an economic downturn happens during the years where you plan to retire, this may also throw a wrench into your calendar. Obviously, at this point in time safe havens sound like they’re all pro, no con, but they do come with issues themselves.
The Downsides Of Safe Havens
They’re not 100% guaranteed. Nothing is when we’re looking at the market. Defensive stocks are more likely to be protective during tumultuous times, but they might not be. Gold and silver have tended to react positively during economic times of difficulty, but there are also factors that go into this as well. One of the obvious points about any safe haven that isn’t a stock is that they aren’t paying dividends. Your asset is just sitting there and it can’t be used to purchase more of that asset. This is also a reason that the vast majority of investors will never go 100% in on any one investment. A diversified portfolio means you’re far more protected against a range of ups and downs.
Before you make a decision about any safe haven, be sure to do a heavy amount of research. Being prepared for a crises means having a percentage of your assets stored in these investments beforehand. Talk to people about their experiences with a particular safe haven, and professionals if you need advice. This article is for education purposes, and it shouldn’t be taken as investment advice. Remember, your money is your responsibility.