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3 Safe-Haven Investments for Troubled Times

It's time to reel back risk

By Jeff Reeves

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There are a host of so-called safety investments that folks tend to flock to in times of trouble. And now seems as good a time as any to dive into these bunker buys to protect yourself.

Some of these are investments meant to specifically move independently of stocks – commodities like gold, for instance. Others are intended to provide bulletproof revenue streams via sales of consumer staples, tobacco and the like. Then you have your income investments like dividend stocks — or even bonds — that throw off cash regularly.

Of course, no investment is a sure thing. But in troubled times it’s worth examining lower-risk options for your IRA or brokerage account.

Here are three safety investments to consider:

Consumer Staples Stocks

Just days ago, the Consumer Staples Select Sector SPDR (NYSE:XLP) exchange-traded fund hit a new all-time high. Its components are the names you probably see on your shopping receipts every week: Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and Philip Morris (NYSE:PM).

All of these stocks hung tough as the market melted down, and have outperformed the stock market in the last year or so. That’s because even in tough times, people will keep buying food, soap and cigarettes.

This kind of stability in revenue is crucial to investors when it appears that other sectors are in for trouble

The downside is that not all consumer staples stocks are created equal. Consider Wal-Mart (NYSE:WMT), which is the quintessential staples retailer for American families. The stock has dramatically underperformed the market over the last year or two as sales have been unimpressive and cheaper rivals like Dollar Tree (NYSE:DLTR) have found a way to steal away shoppers. Wal-Mart may be profitable and a sound business, but it hasn’t been a good investment for the past few years.

In short, strong consumer staples stocks can reduce your risk, but stock selection is key. Perhaps the best way to hedge your bets is through diversified plays on the sector like the aforementioned ETF or other sector-focused mutual fund investments.

Dividend Stocks

Many consumer staples stocks also are attractive because they throw off big dividends. Take Philip Morris, which has a yield of 3.5%. That means its annual payout – $2.56 for each share – is about 3.5% of its current share price of about $70. In short, you’ll get a 3.5% return on your investment even if shares go nowhere.

Other businesses with stable revenue streams also apply – Verizon (NYSE:VZ) and AT&T (NYSE:T) are sleepy telecom stocks that may not ever blow investors away with gains in share prices. But they deliver dividend yields of more than 5%.

In a choppy market, a return of 5% is mighty nice.

The risk of dividend stocks is that they are, after all, stocks. That means volatility that’s inherent to all publicly traded companies. And while the dividends are a great stream of income, they are not guaranteed. Many investors were shocked when General Electric (NYSE:GE) slashed its dividend by 68% in 2009 as the financial crisis rocked the company’s balance sheet and made the dividends unsustainable.

Still, if you do your homework and pick a stock with a high yield and a sustainable payday, your portfolio will be better off. And as with consumer staple stocks, you can find dividend-focused ETFs and mutual funds for your IRA – such as the iShares Dow Jones Select Dividend (NYSE:DVY) ETF, which yields more than 3%.

Gold

If you are really afraid the market is going to go haywire, then your best move may be to find a contrarian play that is independent of equities.

That safe haven investment of choice for most investors is, of course, gold.

Gold has many benefits for your portfolio. As a hard asset, it will assuredly never become worthless, unlike stocks that can go bust. Gold is also an inflation hedge because as commodity prices rise – that is, the price of food or metals or energy – gold appreciates in kind.

Last but not least, gold is the ultimate safe haven. When investors around the world decide to head for the hills, they don’t bury their money under their mattress. In tough times, they turn to gold. What’s more, the supply-and-demand equation means the precious metal will not only protect your wealth but actually make it grow as people clamor for more.

But make no mistake: Gold is an investment. Some would even call it speculation. Over the decades gold prices have been volatile and it’s not uncommon for investors to lose a bundle by buying at the wrong time. Gold flopped from almost $700 an ounce in 1980 to under $300 an ounce five years later in 1985.

And all this talk about gold setting a new record is, of course, splitting hairs. Gold sold for about $850 an ounce in January 1980 – when adjusted for inflation, that was more than $2,400 in 2011 dollars. Bears on gold say this means the rally is overstated, but bulls may simply see that price as a target to set their sights on.

Low Risk Isn’t No Risk

The three low-risk options above are good plays for your portfolio. If you want even  lower risk, you’ll have to go with a CD or a U.S. Treasury bond. But even these investments have a small chance of loss. The debt debate proved Treasuries aren’t as secure as we had always thought, and even at an FDIC-insured institution the government only backs up to $250,000 of your savings account in the event of a bank failure.

Even if these longshots don’t happen, it’s also worth pointing out that the lowest risk investments sacrifice potential return. Is 2% a year really going to get you where you need to be at retirement?

The trick is to recognize there is no sure-thing investment, and to simply think rationally about how to approach your retirement goals. Every portfolio should have a portion in low-risk bedrock investments, but the precise allocation is up to you.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/3-safe-haven-investments-for-troubled-times/.

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