When there’s trouble in an economy, asset values tend to drop. That can mean hard times ahead for your portfolio’s performance, no matter how well it was doing in the past.
Having quick access to, or investing in safe haven assets is a way to keep the situation from hitting your portfolio very hard. These investments keep or even increase their value even when times are tough, although on the flip side, they may not have the same growth potential of other assets when the situation is bright.
While there are some investment products which have historically been considered safe havens, their utility does depend a lot on the situation. What might keep its value in one downturn may be heavily affected the next, and so it takes a little research to identify which safe haven is right for a certain scenario.
However, there are 5 characteristics that safe havens tend to have. Before you find out what they are, note that not all of such assets will have all these characteristics, and so you should consider your situation and preferences when choosing a safe haven.
Liquidity
Liquidity refers to the ease in which an asset can be converted to cash without losing its value. On most occasions, this is a characteristic worth considering when choosing an investment.
This is especially so during a downturn, when nobody really knows how difficult the situation will get or if you’ll need the money you’ve invested. High liquidity will add to the asset’s market appeal while also giving you some peace of mind and flexibility to choose more productive options.
Functionality
While there will always be new and promising assets that appear in the market, safe havens typically have a use that causes long-term demand. This helps them keep their value despite any downturn that may be happening.
Having a true purpose also helps these investments avoid being based on pure speculation. The latter would leave them vulnerable to a lot of different market forces and so make them unsuitable to be a safe haven.
Limited supply
While safe havens don’t have to be rare or highly exclusive items, they should at least be limited in terms of having less supply than demand.
The chances are high that more of these assets will become available over time, especially if an increasing number of people want to put money in them. However, if supply outstrips demand, the value of these investments will drop.
Certainty of demand
Part of why safe havens manage to maintain or grow their value even during a downturn is that demand for them typically stays at a consistent level, although moderate price changes may happen at times.
This steady demand is usually because such assets are quite unlikely to be replaced or to become obsolete or outdated. They have usually stood the test of time, and will probably have weathered many such market fluctuations already.
Permanence
The last characteristic, permanence, simply means that the safe haven will not decay, disintegrate, or otherwise be destroyed. After all, any of these is likely to make the asset’s value fall significantly.
Of course, there may be a chance that such investments will eventually end, but they should at least be free from the risk of physical damage.
