When there is market volatility, you often hear the term “safe haven” in the world of investment. But, is there really a risk-free investment? Are there any safety precautions you can use as an investor to protect your money? Read on to find out.
What is a safe haven?
Ideally, a safe haven is any investment perceived to increase or retain its market value in times of market volatility. Investors are always looking for safe havens to limit their losses.
Unfortunately, in reality, there is no risk-free investment. What appears to be a safe haven now, might be a risky investment in a few weeks. Also, the investment return of an asset is dependent on the market, and unforeseeable variables such as inflation, political instability, and economic recessions.
The following are some of the investments generally considered as safe havens and the myths surrounding them:
The myth: Bonds, especially government bonds, are risk-free.
Bonds are fixed interest investments. They are a way for companies and governments to raise money. The bond issuer returns your money plus interest after a set amount of time.
Government-issued bonds, known as gilts in the UK and treasury bills in the US, are considered safe havens. Investors scramble for these investments because the general perception is that governments are more financially stable than companies. However, there have been instances when governments have been unable to repay investors on the maturity of the bonds.
The best time to invest in gilts is during the initial offering. The other option is to buy them in the open market. However, if you do that, you will obtain the bonds at the market price, which might be higher than the initial price. And, the fixed interest is based on the initial price. Therefore, you could get a higher or lower return than what you invested.
The myth: Gold is a highly stable investment.
The truth is gold is as risky an investment as stocks. The value of gold is affected by demand and supply, the current value of the US dollar, and the state of the global economy. And, its value does not often move in line with other investment assets such as equity and real estate. For instance, after the UK’s decision to quit the EU, the equities market plummeted, but the price of gold hiked.
The point is, investing in gold can be a risky decision. You might need to seek the advice of financial experts. And, like stocks, you need to keenly follow the market fluctuations to know when to buy, hold, and sell.
The myth: There’s no loss when you store your money in cash.
The myth holds some truth as the returns of cash are not affected by stock market volatility. But, the yields of cash are meager. Also, the value of cash is affected by rising costs of living and inflation. These factors will not only affect your returns but also reduce your money’s spending power.
The best way to ensure you do not make a lot of losses is to diversify your investment portfolio. Invest in different asset classes. Each investment performs differently at different economic situations. Therefore, investing in various assets provides a degree of protection during stock market turbulence.
The bottom line is, there is no risk-free investment. So, before investing, conduct market research to learn the best investment strategies and how to manage risks. Most importantly, always remember that no matter the precautions you take, you might still lose money.