What are safe-haven assets and should you invest in them?

Investors turn to safe-haven assets like gold and government bonds in periods of market turmoil. How do they work and should you invest in them?

Gold bullion leaning on a stack of gold ingots.
(Image credit: Getty Images - Dragon Claws)

In the last four years, investors have had to navigate one black swan event after another. First the pandemic. Then the outbreak of war in Ukraine followed by the worst level of inflation for a generation. Now, an escalation of violence in the middle east. 

To top it all off, this year will see a nasty battle for the White House between the increasingly divided left and right wing camps in the US. This is just one of over sixty elections that are taking place around the world in 2024, including the UK. 

It’s a worrying time to be a world citizen – never mind an investor. The world feels more volatile today than it has for a long time.

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Against this backdrop, many are turning to safe-haven assets in an attempt to diversify their portfolios against the risks. For example, the gold price has seen a meteoric rise in recent months. 

The idea behind safe-haven assets is that they hold up well during market shocks – whether that’s a recession, a pandemic or even a war. But are they actually as stable as people think? 

We take a look at how safe-haven assets have held up in different periods throughout history. What options are available to you, and are they worth investing in?

What are safe-haven assets?

All asset classes perform in different ways at different stages of the market cycle. The traditional example that is typically cited is that bonds are meant to rise when equities fall, and vice versa.

This is just a general rule. It doesn’t always work out like that in reality – a lesson investors learned the hard way in 2022 when bonds and equities both fell dramatically and in tandem. 

Some assets have earned the reputation of being safe havens, with investors believing they offer protective qualities when things go awry. Many people have flocked into gold recently, for example, in light of the geopolitical tensions we are currently experiencing. 

Accordingly, the gold price has soared to record highs – although this has partly been driven by falling interest rate expectations and high levels of demand in the Chinese market too. We delve into the full story in a recent article.

Other investments with safe-haven status include cash, developed market government bonds, and certain defensive stocks.

Can you protect your portfolio with gold?

Across recessions, pandemics and interest rate hiking cycles, gold has shown its ability to deliver returns in periods where equity markets have fallen. We call these “uncorrelated returns”. 

For example, when the pandemic hit in 2020, gold ended the year around 25% higher. Meanwhile the S&P posted gains of around 18%, but only after taking investors on a rollercoaster ride of steep loss and recovery. 

Meanwhile, in 2022, central banks raised interest rates aggressively, causing all major regions and asset classes to suffer big losses. The S&P 500 lost around 18%, but the gold price ended the year pretty much flat.

However, while gold can be a useful hedge against stock market volatility, this should not be confused with price stability in its own right. Just because an asset acts as a safe haven during periods of economic turmoil, that doesn’t mean it offers a smooth ride over the course of a full market cycle. 

The gold price can actually be incredibly volatile. 

“Between 1980 and 1982, the gold price fell by over 50%, and between 2011 and 2015, it fell by over 40%, in sterling terms”, flags Laith Khalaf, head of investment analysis at AJ Bell. After falling from its 1980 peak, it then took until 2006 for the gold price to fully recover. 

“That’s a long period in the wilderness,” he adds.

Are government bonds and cash a safe bet?

Developed market government bonds like US Treasuries and Gilts are deemed some of the safest assets out there, as the risk of the US or UK government defaulting is virtually nil. As such, investors flock to these assets in periods of market turmoil to protect themselves. Government bonds saw huge inflows at the start of the pandemic, for example.

Even so, these assets aren’t risk-free either. You only need to look at how Gilts fared in the aftermath of the mini-Budget to know that. 

In September 2022, former chancellor Kwasi Kwarteng and former prime minister Liz Truss announced plans to slash taxes and increase borrowing. This spooked Gilt investors, with markets demanding a higher yield to compensate them for the increased risks. Bond yields and bond prices move inversely to one another – so as yields went up, Gilts crashed in value. 

A supposedly stable asset class proved anything but. 

Granted, this was a black swan event. But even in more normal times, there are risks associated with having too much exposure to assets like government bonds and cash. For most of the last two decades, interest rates have been lower than the rate of inflation – which means cash and government bond investors have lost money in real terms

The great irony of risk management is that being too risk averse is, in itself, a risk. 

Laith Khalaf, head of investment analysis at AJ Bell, highlights this very point. “It’s been better to be a hare than a tortoise when it comes to investment markets over the last decade. Cautious investors have significantly underperformed the global stock market and in some cases, they’ve seen the value of their money actually go backwards once inflation is taken into account”, he explains.

While cash has been a “wealth destroyer” over the last decade, global equities have managed to outpace inflation while providing significant real returns.

What about defensive stocks?

Defensive stocks are often cited as another safe-haven asset. But what exactly are they?

Stocks that provide goods or services that people use all the time, regardless of market conditions, are often deemed fairly resilient. This could include consumer staples like the big food retailers; healthcare companies or pharmaceutical businesses like AstraZeneca; or energy and utilities companies.

However, even these have their ups and downs. Water is about as essential as it gets – but you only need to look at Thames Water to see that demand alone isn’t enough to keep a company’s share price stable if other factors come into play. 

In this case, the stock has plummeted in value as a result of mismanagement and a series of public scandals relating to sewage in the waterways.

Supermarkets are another area that you would expect to be relatively stable given their importance in everyday life. But as we explored in a recent feature, the main listed UK supermarkets have had a bumpy ride over the last decade or so.

With this in mind, the golden rule really is diversification.

Diversification: the golden rule

Each of the safe-haven asset classes we have explored previously can play an important role in your portfolio over the course of a market cycle – but it is important to balance them with a mix of other investments too. 

The safest strategy is to stick to the old adage about not keeping all of your eggs in one basket. Investing is not about jumping from investment to investment as markets evolve. It’s far more of a balancing act. 

The traditional 60/40 portfolio of equities and bonds has been a popular choice for many investors in the past, although many are now looking to diversify this further with exposure to other asset classes like alternatives. 

If you are not sure what asset allocation would suit your needs best, you could benefit from speaking to an investment advisor. For a cheaper alternative, a robo-advisor could be a good starting point too. 

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.