Best ‘Safe Haven’ Investments

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Turbulent investment markets can shake your faith in riskier investments such as stocks and shares.

When markets turn choppy as they have done this year (up to June 2022, the US S&P 500 index has fallen by about 15% since January while the euro area’s Euro Stoxx is down a similar amount), investors are prompted to move their money into relatively safer havens – at least until the volatility subsides.

More stable, lower-yielding investments can help to protect your cash and may even continue to provide modest growth in challenging times.

If you’re looking for alternatives to volatile markets, the following investments offer lower risk than stocks and shares, along with potential financial peace of mind for their owners.

It should be noted that no investment is 100% safe because, with an investment, your capital is always at risk.

With a savings product, your capital is secure, although there is a risk that your account provider might go out of business. However, as explained below, the UK government provides a safety net in such instances worth £85,000.

High interest current accounts

High interest current accounts (HICAs) are current accounts offered by providers such as high street banks, often boasting higher interest rates than savings accounts. As an incentive to customers, some HICAs also offer cash ‘signing on’ rewards.  

HICAs tend to impose requirements on customers, such as imposing a minimum monthly funding amount, along with an upper limit on balances that attract interest. There might also be a time-limit on interest rate deals that are being offered.

Some accounts charge a monthly fee. Before signing up, it’s worth checking how any charges, including monthly fees as well as penalties for going overdrawn, stack up against the enhanced rate of interest.  

Current accounts are regulated by the Financial Conduct Authority. UK-authorised banks fall under the Financial Services Compensation Scheme, protecting customers from corporate failure to the tune of £85,000 per person per institution.

Gold

Investing in gold can provide stability and diversification to an investment portfolio – especially in times of economic turbulence.

Gold is perceived as a ‘safe haven’, offering investors the potential for wealth preservation. It has provided a good hedge against the headwinds of inflation.

This is because, in theory, increased demand during inflationary periods – such as the ones we are experiencing now, with prices in the UK increasing by around 9% year-on-year – can result in a rise in the gold price.

Alongside cash, shares, bonds and property, gold is an asset that can provide investors with the all-important element of diversification. Diversification is useful, because it offers a form of financial protection when one asset class – shares for example – underperforms.

It is often said to have an inverse correlation to other asset classes. In other words, if stock markets are falling due economic uncertainty and rising inflation, gold may produce an enhanced return.

You can buy gold directly, in the form of bullion, coins, or jewellery. Alternatively, it is possible to gain exposure via pooled investments that aggregate the contributions of lots of different people into one managed fund.

A third option is to invest indirectly by buying shares in companies that mine, refine and trade gold. Note that while the prices of mining company shares tend to correlate to the gold price, individual share prices are also affected by fundamentals such as profitability, environmental issues and geo-political and regulatory risks.

Exposure to gold is not risk-free. As with any asset class, the price of gold fluctuates and is subject to the usual laws of supply and demand, so you could lose on your original investment.

Bonds

Bonds are a type of investment that tends to be more secure and less volatile than stocks and shares.

In terms of risk, think of them as a half-way house between having your cash on deposit and full-blown equity investing.

Bonds are issued by governments, companies and financial institutions (find out more here about fixed-rate bonds issued by the latter).

In the UK, government bonds are known as ‘gilts’, while in the US they are referred to as ‘Treasuries’. Bonds are essentially ‘IOUs’ and work the same way, regardless of the issuer.

When you buy a bond, you’re lending money to the issuer in return for interest payments during the life of the bond (known as the ‘coupon’), plus the return of your initial loan when the bond matures.

Bonds are also referred to as ‘fixed income securities’ because, as an investor, you know in advance the return you’ll receive on your investment.

The interest rate, or coupon, you receive varies from one bond to another. The riskier the bond, the higher the interest rate you can expect to receive, coupled with the increased chance of not getting back your original investment.

High-quality government debt from countries like the UK and US (neither of which have ever defaulted on their repayment obligations) sits lower down the risk ladder than the debt issued by companies.

Ratings agencies, such as S&P, Moody’s and Fitch, analyse countries and companies and rank their credentials in terms of the quality of debt that’s being issued.

You can buy UK gilts from the Debt Management Office. Gilts can also be bought via a stockbroker or a bank using the Retail Purchase and Sale Service. This would incur fees, cutting down on any profits.

It’s also possible to invest in fixed interest securities via a range of investment funds and exchange-traded funds  – typically via investment platforms and trading apps – that specialise in bonds.

Holding bond funds in a stocks and shares individual saving account (ISA) provides a tax-exempt wrapper for your investments.

Property

Investing in property is not risk-free. But exposure to bricks and mortar can be placed in the ‘relatively safe’ investment pigeon-hole. Property also has the potential to produce an income stream, alongside the prospect of capital growth.

It’s possible to invest in property in a variety of ways, either directly or indirectly. The most obvious way is to buy a building and rent it out. Bear in mind that, on top of the purchase price and any associated mortgage, there will be extra fees (estate agents, solicitors, surveys, stamp duty, insurance, lettings agents) to find.

An alternative is to buy into a specialist property investment fund that focuses on retail, industrial and office buildings.

The performance of property funds usually depends on how the economy is performing. In good times, demand for property increases. This pushes up both rents and property prices and prompts extra construction. During slowdowns or recessions, the opposite tends to apply.

As with any investment, the value of property investments and the income they provide can fall as well as rise.

Property also has the drawback of being a relatively ‘illiquid’ asset, that is, one that can be hard to sell. In extreme cases, investors can be locked into property portfolios while they wait for managers to sell off buildings.

No guarantees

It’s worth repeating. There’s no such thing as a completely risk-free investment. Even so-called safe havens come with risks, for example, the loss of purchasing power over time as inflation rises  – a hallmark of even the most cast-iron savings account.