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Understanding Safe Haven With Examples

Tue Feb 16 2021 07:00
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During the COVID-19 outbreak or even before, we all have heard about the term safe haven. Whenever the market trembles, investors rush towards these assets. 

Safe haven is also a kind of investment but it is safer and less volatile than any other stock or commodity. That is the reason why investors prefer to put their money in a safe haven when the market goes wild. 

Investors need to first do fundamental analysis over how well the safe haven will go ahead. If a safe asset is also having turbulence, then they need to find something else. How the down market is performing, and severe is the impact, are some aspects that investors need to know. In this article, we will have a detailed look into the safe haven and some striking examples of it.  

Safe Havens 

The safe-haven assets work as a shield for investors' portfolios in tough times. When any kind of economic mishap happens, the first thing that any investor will do is protect the money. As there is a very high risk of losing the money in no time, it's become vital to take action. 

In such situations, the investors seek some sort of place which is less risky and less volatile. Here come our safe haven options that assure stability in the downturned market. 

In simple terms, these special types of options act as a cushion for their portfolio. When a market falls, investors either square off or divert to these investing options. During the COVID-19, all investors at some point used these options for protection.  

How does it work? 

In any kind of investing, be it stocks, or commodity investing, diversification happens. In this process, an investor, depending on the market condition, manages the portfolio. In cases where the market volatility is higher for a longer time, these assets come into use.

Regardless of any country, the volatility factor is always there in all kinds of markets. Sometimes, the market tremble is for a shorter period of time. And on the other side, markets stay unstable for a longer time. So, the safe havens work as a negative correlation to the current market condition. 

In tough situations, when markets are performing wild, the safe havens try to keep up with their value. This is how any safe asset works in the market and saves the investor from losing money due to any uncertain act.  

Characteristics: 

So, let's try to jump into some core characteristics of safe haven and how they react in the market.  

Liquidity: 

When it comes to safe havens, there is always enough liquidity as compared to other assets. So, it's most of the time profitable to open or close a position without worrying much. It's a pro tip for all beginners to leverage the safe havens as early as possible when the market falls.  

No surplus supply 

The main reason why these assets have higher value is that they come with a little supply in the market. It's the reason the prices are always on the higher side. And, this concept will remain the same in 2021 and in the upcoming time.  

Constant in demand 

As they come with a little supply, the demand is always on the higher side which keeps the price strong. Be it gold, or any bond, there will be a constant demand for them.  

Examples of safe havens 

Now, we have understood what these assets are and why they are so important for the market. On this note, let's have a look at some of the best examples of safe havens that you should trade.  

Gold

The first and the most famous entity that is everyone's favorite is the valuable metal, gold. We can call it the most trustworthy and always-available resource for investors. This is among those assets that never face any pressure or influence by any external thing. 

Be it banking changes, international pressure, economic crash, good always remains safe. As gold's supply is very finite, it is not possible to manipulate its supply with currency. 

If you are looking for the top item that remains the safest, gold is for you. And, the best part is that you don't have to give heavy brokerage for buying or selling it. No matter if the market goes bullish or bearish, gold is there for your help.  

Defensive market stocks 

Despite anything happening around, there will be some companies that are profitable. These companies or organizations work on consumer services, goods that always remain in demand. 

These companies fall in consumer manufacturing like food, healthcare, commodities, and basic staples. You need to figure out which are these companies. These could be also your safest bet when the market goes unstable. As there is always a constant demand for these staples, these companies will make profits. 

During COVID-19, there were many food, beverages, and medical companies that delivered profits. All you need to do is to perform a fundamental analysis of such companies and pick the stocks with utmost care. You can also include these stocks in your portfolio ad hold them for a longer time.  

Safe haven currencies 

Yes, there are some strong currencies that fall under this category and you can invest in them. These currencies are less volatile and have better stability as compared to others. Some of the safe-haven currencies are the US dollar, Swiss franc, Japanese yen. 

These currencies are stable than other bills because their countries' GDP is strong. GDP is not the only factor and there could be many like security, their gold reserve, and more. The Swiss franc is among the most loved currency when it comes to safe haven. Switzerland's banking system is among the best in the world which is stable, robust, and safest.  

Cash 

Cash is having a lower return yield as compared to other assets, but it's the most accessible safe haven. As you can use it anytime and anywhere needed, cash is reliable and acceptable. For anyone who is looking for strong financial safety without any kind of return, then cash is the thing. 

Even if you have foreign currencies with you within the allowed limit, you can exchange them. But, as this entity is prone to inflation, you need to keep this thing in mind.  

Treasury Bills 

You can say it is the safest option to put your money and maintain the real value. These are the securities that have strong support from the government. Treasury Bills or T-Bills are almost free from any kind of risk, and you get decent returns on it. 

As these T-Bills are hassle-free to maintain and keep, you can invest without worrying about it. Every country has its own kind of treasury bills by different names, and it's profitable.  

Summary 

Now, we know what to do when the economy takes a U-turn amid any external factor. Safe havens are the most reliable options for all investors to keep their portfolio safe. Depending on your needs, pick the right type of safe haven and trade in a stress-free manner around the world. 

Whether you are a beginner or intermediate, you need to use these options for security. And, the best part about safe haven is that you can buy them no matter how small or big your portfolio is.  
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