Sometimes, when market volatility is on the rise, finding places that can protect your money and avoid downside risk is huge. One of the crucial things to understand about investing is that risk is always a possibility. If you look at the recent volatility in the market, you might be wondering where you can keep your money safe until the dust settles. That’s why it can really pay off to understand what the most common safe-haven assets are.
If you aren’t familiar with the term “safe-haven” asset, it refers to investments that limit exposure to losses in the event of huge market drops like what we have seen lately. These types of assets can protect your capital and even make you money in times of economic uncertainty. Whenever you purchase a safe-haven asset, you aren’t trying to make a huge gain on the investment. Rather, the thought process behind buying them is that they will retain their value and limit your exposure to the downside during huge downturns.
Just keep in mind that these types of securities are also in unfamiliar territory as markets come to grips with the uncertainty surrounding the Coronavirus. Below, we are going to walk you through some of the most common safe-haven assets to give you a brief overview of how they can help to protect your capital during this period of uncertainty.
Gold is without a doubt the most commonly known safe-haven assets. During times of fear and uncertainty, investors flock to gold for safety. That’s because it usually provides some stability when things become unhinged in the market. The thought process behind gold as a store of value is that since it is a physical commodity, there is a finite amount of it in the world and therefore it is less susceptible to the effects of things like interest rate decisions that are made by the Federal Reserve. It is also an asset that is known to increase in value when inflation is on the rise.
If you pull up a chart of Gold right now, you will quickly see that the commodity has been in a Bull Market for some time now. There have been a few downturns of the price of gold in recent days, which are likely the result of forced liquidations, but there is no denying that Gold has been a very strong asset to own this year. As the Federal Reserve continues to inject liquidity into financial markets and print more money, it’s possible that Gold might help investors to limit their equity risk exposure. On the other hand, what we are seeing in the financial markets right now could lead to huge liquidations across all asset classes as liquidity dries up, so keep that in mind.
- U.S. Treasury Bonds
Another security that is traditionally considered a safe-haven asset is U.S. Treasury Bonds. Many rely on treasury bonds to protect their downside because the debt market in America has historically been highly liquid and because they are backed by the U.S. Government. In exchange for tying up your capital in the long-term, you are guaranteed to get your money back along with interest. However, interest rates in the credit market have been dropping to historic lows, which might dent the theory that they are truly low risk. With that being said, you can expect a lot less volatility in the bond market than you would in the equities markets.
The issue with U.S. Treasury bonds is that when lots of investors start flocking into them, the demand results in lower yields. The huge flow of money into the bond market and current economic conditions have resulted in a monumental response from the U.S. Federal Reserve. We are seeing rates that are historically low and could go even lower if the Fed cuts interest rates yet again. Keep that in mind if you are planning to use U.S. Treasury bonds as a safe-haven investment.
The U.S. Dollar
During times when volatility seems to be affecting every single security in the market, you might be best off staying in cash. The U.S. dollar is another common safe-haven asset that you can explore to protect your capital. Many people flock to the US dollar for safety during times of economic uncertainty. Simply look back on how the dollar performed during the global financial crisis roughly a decade ago. We are seeing a similar performance in the U.S. Dollar now, so keep in mind that cash is a position that can offer safety during times of uncertainty.
Are These Assets Truly Safe?
This a great question to ask, especially given the recent market volatility. The truth is that we are in the midst of a massive selloff across all asset classes. The credit market seems to be in turmoil and has resulted in the Federal Reserve taking drastic measures to keep the market liquid. As investors become more and more concerned about finding a safe place to park their money, it’s up to you to decide whether or not these types of assets are right for you.
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