Weathering the ups and downs is a natural part of investing. Though risk is always present, there are so-called safe haven investments that may protect your money when the market isn’t doing well.
During uncertain times, people may turn to assets that can keep the value of their money stable, including fixed-income instruments like bonds. But can you really consider bonds as safe havens?
Read on to learn the common characteristics of safe haven assets and whether bonds meet the criteria.
What makes an asset a safe haven?
Safe havens tend to preserve or even grow their value when many other assets are suffering losses. There are no universal standards for safe haven investments, but there are common characteristics you can look for:
- Liquidity – Easy to sell for cash when needed.
- Functionality – There’s a real purpose that leads to long-term demand.
- Limited supply – Highly likely to stay valuable because supply doesn’t outpace demand.
- Consistent demand – Stable interest among investors means the asset is unlikely to go obsolete.
- Permanence – Free from the risk of decaying or getting destroyed.
Take note that a negative event may affect different types of investment vehicles in different ways. What’s bad news for one may be good for another.
Because of this, it might be impossible to find an asset that’s always safe. What counts as “safe” may depend on the circumstances of an event and your own preferences.
Do bonds qualify as safe haven investments?
When there’s uncertainty in the stock market, investors typically flock to bonds. They expect a negative correlation between stocks and bonds, which means one is up when the other is down.
In this scenario, stock investors consider bonds as a safe haven. Does this apply to other situations?
To find out, let’s compare the features of bonds with the common characteristics of safe haven investments:
| Typical safe haven qualities | How bonds measure up |
| Liquidity | There are different ways to invest in bonds and liquidity may vary based on how you’ll invest. Investors can trade bonds in the secondary market, which might make it easier to buy and sell especially if you’ll do it online or through an app. |
| Functionality | Governments and corporations issue bonds to raise money by borrowing from investors. In return, investors get periodic interest payments on top of the amount they invested. |
| Limited supply | Bonds have a definite lifespan and there’s no guarantee that they’ll be replaced with new ones after they mature. Issuers may decide whether to issue bonds or not depending on market conditions and the interest rate, which determines the cost of borrowing money. |
| Consistent demand | Bonds have been around for centuries, which shows that they’ve stood the test of time. However, demand may depend on the type of bond, interest rate, and the issuer’s creditworthiness or ability to repay investors. |
| Permanence | Bonds are financial assets and so they can’t be damaged or destroyed in the same way as physical properties. |
While bonds show some common safe haven qualities, there are potential downsides to consider. These include changing interest rates and default risk.
When the key interest rate goes up, bond prices in the secondary market may fall since new bonds will be more attractive. You should also consider credit ratings, which reflect issuers’ capacity to pay debt.
These ratings will tell you just how safe a bond is or if a default is possible. With these risks in mind, bonds might not qualify as a safe haven across all situations.
If you choose to put money in bonds, it may be wise to also look for other ways to diversify your portfolio and minimize potential loss.
