This week’s market volatility has focused investors’ minds on protecting their recent gains. After a remarkable eight months in which last autumn’s losses have been erased from the memory, safe havens are back on the radar.
So where should investors look for a port in the storm? And, just as important, how can they be sure that the haven they choose really is as safe as it looks?
Here are seven of the most popular places to hide (and some thoughts on whether they really are all they seem):
1. Bonds. Fixed income investments are generally thought to be safer than shares. That’s because the returns they offer are more predictable. As long as the issuer (a company or government usually) does not default, you know what the income will be and how much and when you will get your money back. Because of this certainty, however, the returns on bonds have historically been lower than from shares. And today, the prospective returns are lower than they have ever been. That’s because demand for bonds is so high that prices have risen sharply and the yields they offer have fallen. In some cases (bonds with a value of $15trn around the world) the yield is actually negative - investors are paying for the certainty of a return of nearly all their money back in due course. Bonds might rise further but the risks are certainly much higher today than they have been.
2. Gold. Another traditional port in the storm, the precious metal has risen in value this year as investors have sought shelter from the market turmoil. The price of gold rose above $1,500 this week for the first time in six years. The attraction of gold is its scarcity. Unlike a paper currency a government can’t print more of it at will. That means it tends to hold its value over time. The downside of holding gold is that it pays no income, which means it becomes less attractive as interest rates rise. That, however, looks like a distant prospect at the moment, so in the short-term gold could go further.
3. Currencies. There is a small handful of currencies which investors tend to buy into when things look shaky. The main ones are the Japanese yen and the Swiss Franc, although the US dollar can become a safe haven at times too. As with bonds, however, port-in-a-storm currencies already look expensive, something you realise as soon as you try to buy literally anything in Switzerland. Another problem is that currencies are unpredictable and volatile. Dealing in currencies is a specialism that most personal investors would be wise to avoid. And if you try to play currencies by buying other assets like funds or shares then the movement of the underlying asset can easily offset any currency gain.
4. Cash. The ultimate safe haven. Cash has one big advantage. You know exactly how much it is worth and what it will buy you, in your own country at least even if not on holiday. Cash also has a major disadvantage at the moment. Thanks to falling interest rates, it pays almost as little income as gold. This means that in inflation-adjusted terms a cash investment is constantly going backwards.
5. Defensive stocks. Some types of shares move up and down less than others. They are known as defensives and are to be found in the parts of the market which are least vulnerable to the economic cycle. Even in a recession, people tend to continue eating and heating their homes. The companies that serve these basic human needs can be expected to deliver profits and dividends whatever happens in the outside world. As with some of the other safe havens listed here, however, defensive shares have already priced in this big advantage. Investors are paying a high price for their perceived security. And no-one should think that defensive shares are immune to market downturns. They will also fall, especially if they start out over-priced.
6. Developed markets. Investors tend to think of emerging markets as being riskier than those in the developed world. There is some truth in this, but it is probably more accurate to say that emerging markets are more volatile, not that they are more risky. The difference is important. Volatility measures how much an investment moves up and down over time. Risk indicates the chance that you will lose your money permanently. Depending on the time-horizon of your investments you may not worry about short-term volatility. If emerging markets are cheaper than their developed counterparts, they may actually represent a lower risk.
7. Multi-asset funds. One type of fund that protects investors from the ups and downs of the market is what used to be called a balanced fund. These invest in a mixture of different asset classes, sometimes just shares and bonds, sometimes a more diverse mix that includes commodities, property and other alternative investments. With investors flitting between different types of investment on the basis of their perceived risk, holding a mixture of assets can be a good way to get a good night’s sleep.
Investors looking for a safe haven in today’s volatile markets could look at the Fidelity Select 50 Balanced Fund. As its name suggests, this fund invests predominantly in a range of funds listed on our Select 50 list of our favourite investments. It invests around the world and across different asset classes. My colleague Emma-Lou Montgomery recently interviewed the fund’s manager Ayesha Akbar.
More on Fidelity Select 50 Balanced Fund
Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.