Is there really such a thing as a safe haven asset?

28 April 2021

The term ‘safe haven assets’ is often bandied about - but this catchall phrase shows that there is confusion about what they are and how they work. 

It’s important to note that no single asset can protect you from all the various risks the investment markets expose you to.

In the same way a lifejacket protects you from drowning, but is of little use in a car crash, different assets protect you against different types of risks.

As such, it is important to realise which risks you are primarily exposed to, which you are willing to assume and when to reduce or hedge others.

The other important concern is that safe haven assets always come with a “cost”.

Just like insurance has a monthly payment, adding these assets to a portfolio will have certain downsides as well.

Two of the more common assets used to reduce risk are gold and money market funds. 

Both of these have a long-established track record, are well understood and easy to access - but they hedge different things.

Money market funds are used to reduce the volatility of a portfolio and reduce the liquidity risk of an individual or organisation, reducing the likelihood of forced selling at just the wrong time. They are safe and liquid, with predictable returns. But the cost is that they are one of the lowest long-term return asset classes in the world. 

The cost of inclusion in a portfolio therefore is lower potential returns. The upside is perhaps a better night’s sleep. 

Gold, as another long favoured safe haven, is very different. 

As it is priced in US dollars (USD) it can be very volatile, and it also does not pay interest or dividends. Over the last 25 years, gold is up 6.15% per annum vs the 9.66% of the S&P 500 as measured by total return in USD. It is used primarily in portfolios as it has a very low correlation with other asset classes and it also serves as a hedge against inflation.

Safe haven assets are used as part of a holistic portfolio solution and one should never over-allocate to them.

But they certainly allow for more portfolio flexibility, better investment planning and reduced portfolio volatility.

What about Bitcoin and Crypto?

These are not a safe haven assets in the traditional sense, but the recent uptick in valuation have added them to the portfolio discussion. This is very much an evolving space and there are always new additions to consider. Bitcoin, Ethereum, Dogecoin, NFTs and others are seeing significant uptake in the investment community. At the moment, the prudent course of action if one is interested in this space is a well-diversified set of different options, backed by significant research.  These are asymmetric payoff investments where the likelihood of each going to either zero or up 10x are things to consider. Participation in this space could add a lot of value, but don’t over-allocate to either the segment or any one investment.