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Concept of gold as safe-haven asset

Dividend University

Understanding Safe-Haven Assets

Justin Kuepper Apr 02, 2020


Every economic downturn invariably leads to a flight-to-safety among investors, but the COVID-19 outbreak has been among the most rapid.

Historically, several safe-haven asset classes have been strong performers and could become a permanent part of some portfolios as investors reassess the risk of future pandemics.

Let’s take a look at common safe-haven asset classes and how you can build them into your portfolio.

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What Are Safe-Haven Assets?


Safe-haven assets, as their name suggests, are assets that are considered “safe” during periods of economic uncertainty. In other words, they tend to either retain or gain value during troubled times. Analysts quantify an asset’s safety by looking at its correlation with conventional assets along with other criteria, as shown below, that make them desirable to own during a downturn.


Investors turn to safe-haven assets in order to remain solvent, stabilize cash flow, and generate income to capitalize on opportunities from market dislocations.

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A Review of Safe-Haven Asset Classes


There are different types of safe-haven assets. While bonds and gold are the most well-known from a historical perspective, inflation-protected securities and cryptocurrencies have also been lumped into the category. It’s important to carefully assess the pros and cons of each option before committing any capital to them.

There are different types of safe-haven assets. While bonds and gold are the most well-known from a historical perspective, inflation-protected securities and cryptocurrencies have also been lumped into the category. It’s important to carefully assess the pros and cons of each option before committing any capital to them.


Implications for Investors


Safe-haven asset classes have different uses depending on the nature of the economic downturn. For example, some asset classes are ideal during inflationary periods, while others are ideal during deflationary recessions. Investors should understand these differences in order to choose the right option for their portfolio.


When weighing their options, investors should carefully consider the cost opportunity and tradeoffs associated with each safe-haven asset class. Gold may seem like a very safe asset, but it doesn’t offer any yield and performs poorly outside of dire circumstances; whereas, real estate is illiquid and susceptible to a housing crisis.

The easiest way to build exposure to safe-haven asset classes into a retail investor portfolio is by using exchange-traded funds (ETFs); although, some investors prefer to invest directly in bonds or hold physical assets (e.g. real estate or gold).

Be sure to read this article to know more about tactical asset allocation strategies.


The Bottom Line


Safe-haven asset classes are common destinations during an economic downturn, but they aren’t all created equal. Investors should be familiar with the pros, cons and use cases for each safe-haven asset in order to make the right decision for their portfolio given the circumstances.

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