Safe haven investments are usually defined as those asset classes that should in theory keep or even increase their value when markets are turbulent. Investors often flock to them during market downturns to try and reduce their exposure to potential losses, but it’s vital to understand that what may appear to be a safe investment usually comes with its own set of risks. Investments that are often considered safe havens during periods of stockmarket volatility include gold and cash, as well as gilts and bonds.
The myth: Gold is always a stable investment.
The reality: Demand for gold often soars during periods of stockmarket volatility, as its value tends not to move in line with other assets such as equities or property. When markets plummeted after Britain’s decision to leave the European Union, for example, the price of gold price immediately rose. However, gold itself can be very volatile, with demand and supply, the strength of the US dollar and the state of the global economy all having an impact on its price. If you’re considering investing, be prepared for a potentially bumpy ride and seek professional financial advice if you’re uncertain whether this is the right kind of investment for you. Bear in mind too, that investing in gold yields no income.
Remember that buying and holding physical gold, which can be expensive to store, isn’t the only way you can access the precious metal. For example, a physically-backed gold exchange-traded fund (ETF) provides exposure to bullion.
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Another option is to invest in the shares of gold-mining firms although these don’t necessarily move in line with the price of the yellow metal. Funds such as the Blackrock Gold & General fund, for example, enable you to invest in a diversified portfolio of gold-mining companies, overseen by a professional fund manager. Much of the success of such portfolios will be down to the profits or lack thereof made by the firms they invest in, as opposed to just the gold price. Remember too that gold, like all investments, can fall as well as rise and you may get back less than you invested. Similarly, the past performance of gold, in common with all investments, isn’t a guide to future performance.
The myth: You can never lose if you put your money into cash.
The reality: Cash is often perceived as the ultimate safe haven because your returns aren’t impacted by stockmarket volatility. However, although you should get your money back, when interest rates are very low, inflation, or the rising cost of living, can eat into your returns and reduce the spending power of your cash. That said, it’s crucial to always keep some money in cash, in case of an emergency, or as a rainy day fund. As a general rule, it’s sensible to hold the equivalent of three to six months’ expenditure.
Remember too that while qualifying cash deposits made with financial institutions authorised by the Prudential Regulation Authority (PRA) are protected by the Financial Services Compensation Scheme (FSCS), they’re only covered up to a maximum limit of £75,000 per person, per institution. Find out more about the FSCS and compensation limits.
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Gilts and bonds
The myth: Bonds, especially gilts, are risk-free.
The reality: Bonds, also referred to as fixed interest securities, are fixed-term IOUs issued by companies or governments looking to raise money. In exchange for you lending your cash, the bond issuer will pay you interest for a fixed term and when the bond matures you should get your money back in full, if you bought the bond when it was first issued. Bonds issued by governments, known as gilts in the UK, are generally perceived as safe haven investments because the general view is that countries are often more financially secure than companies. However, if the bond issuer can’t meet interest payments or repay the capital when it’s due, you could lose your whole investment. While corporate bonds are viewed as riskier than government bonds, there have been occasions when some countries have been unable to meet repayments.
While you can invest in a bond when it’s initially issued, they’re also traded on the open market, so you can buy them at any stage of their life. However, if you do, you’ll pay the market price, which could be more or less than the price when it was first issued. Since the fixed interest rate, known as the ‘coupon’ is based on a bond’s initial price, you may get a higher or lower percentage return. When the bond comes to the end of its term, the repayment of capital will be the amount that was paid when it was initially issued – again, this might be more or less than the market price that was paid. You’re dependent upon the issuer being able to meet their obligations when the bond matures, to get your money back.
But gilts and bonds are generally viewed as a good diversifier in an investment portfolio, as their prices are affected by different market conditions than share prices. They also usually provide a regular, stable income through their interest payments. To get an idea of how risky a particular bond is you should look at its credit rating, which is an assessment of the risk of a company or government not paying back its debt, carried out by a specialist agency. The lower the credit rating, the more risk involved, but the higher the rate of interest offered will be. Bonds with higher credit ratings carry less risk, but offer lower rates of interest. Like all investments, bonds come with risk and you could lose money.
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How to weather stockmarket storms
Diversification, where you spread risk by investing in a range of different asset classes is one of the best ways to protect yourself from losses caused by stockmarket turbulence. As each type of asset will perform differently at various points in time, this can help reduce overall volatility and offer a degree of protection when stockmarkets fall.
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Always research the asset class and sector of any investment you’re considering, to see how similar it is to other investments you hold. It’s also important to keep in mind that no matter what steps you take to manage risk, your investments can still fall in value and you may get back less than you invest.