Best ‘safe haven’ investments

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

Markets have turned choppy this year: the US S&P 500 index has plunged by about 20% since January, for example, while the Euro area’s Euro Stoxx index has fallen by a similar amount. In such conditions, investors often turn to ‘safe havens’ for their money.

Safe havens in this context are stable, lower-yielding savings and investments options that help to ringfence your cash in testing economic times, but which also offer the potential for modest growth.

Safe havens tend to demonstrate one, or more, of the following characteristics:

• Liquidity: where the asset in question can easily be converted into cash at any time.

• Functionality: the asset is associated with a use that remains in demand for the long term.

• Limited supply: where the growth of supply never outweighs the demand.

• Certainty of demand: where an asset is unlikely to be replaced or become outdated.

• Permanence: so that the asset should not decay over time.

Even when considering the relatively benign world of financial safe havens, it’s worth remembering that no investment is 100% safe. Capital is always at risk.

There’s also a slight element of jeopardy attached to saving products: your capital may be secure, but this is set against a risk that your account provider could go out of business. However, as explained below, the UK government provides a safety net in such instances up to £85,000.

If you’re looking for alternatives to volatile markets, the following suggestions fall into the safe haven category in that they offer lower risk than stocks and shares and provide potential financial peace of mind.

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 traditional savings accounts. As an incentive to customers, some HICAs also offer cash ‘signing on’ rewards.

HICAs tend to impose requirements on customers, such as insisting on a minimum monthly funding amount, or stipulating an upper limit on balances that attract interest.

Other conditions might also apply. For example, an account holder might be required to set up a minimum number of direct debits attached to the HICA. There could also be a time-limit on the interest rate deals that are being offered.

Bear in mind that some accounts also charge a monthly fee. Before committing to a product, weigh up how any charges - recurring fees, for example, or penalties for going overdrawn - stack up against the enhanced rate of interest on offer.

Current accounts are regulated by the Financial Conduct Authority. UK-authorised banks fall under the Financial Services Compensation Scheme. This protects customers in the event of 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 during times of economic turbulence.

Gold is referred to as a safe haven because it offers investors the potential for wealth preservation. Traditionally, the precious metal has provided a good hedge against 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 9.9% year-on-year - can result in a rise in the gold price.

The UK’s inflation rate is not expected to drop any time soon thanks to surging energy prices and the ongoing conflict in Ukraine. In fact, the Bank of England warned recently that it expects UK inflation to peak around 13% later this year, before remaining at “elevated levels” through 2023.

Alongside cash, shares, bonds and property, gold can also 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.

Gold 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 different investors 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 laws of supply and demand, so you could lose on your original investment.

Bonds

Notwithstanding events in recent days when the mini-budget spooked the markets, bonds are an 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 essentially loans issued by governments, companies and financial institutions (find out more here about fixed-rate bonds issued by the latter).

Bonds can be traded on markets in the same way as stocks and shares. They have a lower profile than the latter, but the market for them worldwide is enormous – about £100 trillion according to the Securities Industry and Financial Markets Association.

In the UK, government bonds are known as ‘gilts’, while in the US they are referred to as ‘Treasuries’. The best way to think of bonds is as ‘IOUs’ that work the same way regardless of the issuer.

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

Bonds are also referred to as ‘fixed interest 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 investment funds and exchange-traded funds  - typically via investment platforms and trading apps - that specialise in holding bonds.

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

Property

Investing in property is far from 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 that there’s no such thing as a completely risk-free investment. Even so-called safe havens come with risks.

For example, the most cast-iron savings account that pays a fixed rate of interest will experience a loss of purchasing power thanks to inflation.

But the worst thing savers and investors can do is sit on their hands, especially in times of extreme inflation. Making your money work as hard as possible is one of the key pillars of prudent financial planning.