Risk aversion and risk preference are two attitudes that play up in the minds of investors while they make investment decisions. Generally, a risk averse investor would choose capital preservation over the promise of potential, uncertain superior returns. In other words, they prefer certainty over uncertainty. On the other hand, risk-taking investors choose the other way around.
Before getting into strategies that can be deployed for risk aversion, let’s understand what risk is from the perspective of investing. Risk, by definition, is the uncertainty associated with an investment option that could potentially negatively impact the committed capital. Reduced variability in returns, therefore, makes an investment option a safer bet or a safe haven.
What Are Safe Havens?
A safe haven is an asset that will retain its value or even grow in the face of negative shocks such as economic downturns, geopolitical tensions, broader financial market collapse, etc.
Every coin has two sides to it. Preferring safe havens shuts an investor out of the opportunity of making disproportionate profits that are usually associated with risky bets.
Few financial assets are historically designated as safe havens. Therefore, one should be mindful of the fact that even these purported safe haven assets behave differently under different market conditions. So, the best way to insulate your investment against any potential risk is to have a well-diversified portfolio.
Gold has historically been the go-to safe haven. It is considered as a store of value during times of uncertainty and also a hedge against inflation. Of late, Bitcoin (BTC-USD) backers have begun touting the apex crypto as a safe haven, claiming it can also hedge against inflation.
There is some merit to the argument that Bitcoin can protect against rising prices in times of uncertainty. We can see through the conflict in Eastern Europe that crypto lock-stepped with equities and underwent wild gyrations.
Here are a few safe haven investing ideas that could come in handy amid the evolving fluid scenario:
- Government Bonds
- Currencies Such as the U.S. Dollar, Yen, Swiss franc
- Real Estate
- Infrastructure Projects
- Defensive Stocks
Safe Haven Investing Ideas: Government Bonds
Government bonds are debt instruments issued by governments that guarantee investors a steady stream of interest income and eventually principal repayment. In the U.S., short-term bonds maturing in a year or less are called Treasury Bills (T-Bills). Those with a maturity period of two to 10 years are called T-notes. Similarly, those with a maturity period of 20 to 30 years are called T-bonds.
U.S. treasuries have long been considered the safest bet for investors, given the lack of safer alternatives and the clout that the U.S. wields as a global superpower. U.S. treasuries are, however, losing their appeal in recent times vis-à-vis bonds offered by countries such as Germany and Japan, according to Bloomberg.
The primary reason for this is the unsustainability of the U.S. debt that has now-and-then threatened to bring the country to the brink.
Amid the most recent market turmoil that manifested in full force since the start of 2022, the yield on the 10-year Treasury note continued to spike. It increased from 1.512% at the end of 2021 to around 2.19%, sending bond prices lower. This suggests there has been a flight away from the instrument. The shorter maturity bonds, however, are fairly insulated.
Investors have more than one way to invest in bonds. They can invest through TreasuryDirect, a system run by the U.S. Treasury Department. Through the website, they can directly subscribe to bill, note and bond offerings from the government.
The other avenues are buying bonds in the secondary market, or investing in a treasury money market mutual fund or government bond ETFs.
Currencies (U.S. Dollar, Yen, Swiss franc)
The U.S. dollar’s status as a reserve currency has rendered it as a safe haven. The bulk of international forex reserves held by central banks are held in dollars. Additionally, most commodities, including gold and crude oil, are dollar denominated. Even more, the dollar is the dominant currency when it comes to financing cross-border trade and funding.
Washington’s recent decision to freeze Russian central bank assets that are held in the U.S. raised doubts about the safety that is associated with the dollar.
Morgan Stanley seems to think the greenback will hold its own. The firm’s Head of FX and EM Strategy James Lord said in a market podcast on Thursday:
“Despite frequent calls for the end of the dollar based international financial system over the last couple of decades, the dollar remains overwhelmingly the world’s dominant reserve currency and preeminent safe haven asset.”
Outside of the dollar, the Japanese Yen and Switzerland’s Franc are also considered safe havens.
One can invest in the U.S. dollar by buying it directly in the forex market. Alternatively, an investor can choose to put their money in USD ETFs, such as Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP) and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA:USDU).
Safe Haven Investing Ideas: Real Estate
Real estate investing is another avenue to hedge against risks and uncertainties. It appeals due to a host of factors such as utility value, exchangeability, relative permanence and the scope of generating returns in the form of rent.
Investors also view real estate as a hedge against inflation. Inflation is based on consumer prices, while real estate prices are a function of supply, construction and demographics. Additionally, the lack of correlation with volatile assets classes, such as stocks, increases real estate’s appeal as a safe haven. It also vests other advantages, such as allowing leveraged investment and availing tax benefits.
Real estate investing, however, is not without its risks. The initial investment for this option is considerably higher and there are recurring expenditures, such as maintenance fees and property taxes.
There are a variety of ways to commit your investment dollars into real estate. Some examples are buying rental properties, real estate flipping, participating in real estate crowdfunding and investing in real estate investment trusts (REITs).
The Covid-19 pandemic and the war in Ukraine underline the vagaries associated with investment in financial asset classes. Against this backdrop, investment in infrastructural projects, especially green energy projects, present a better alternative.
Given the paucity of funds to finance infrastructure projects, debt funds of institutional investors, pension funds and insurance companies have stepped in to make up for the shortfall following public funding. The demand and supply equation for infrastructure funding is tilting more toward the demand side, rendering attractive returns.
Investors may choose to invest in infrastructure trusts. Like mutual funds and REITs, they allow investors to purchase units of the trust. In return, these trusts make distributions to unitholders on a period basis.
Safe Haven Investing Ideas: Defensive Stocks
Defensive stocks generate relatively stable returns for investors irrespective of the economic conditions. These could be stocks of blue-chip, high-quality companies, which can weather the impact of external uncertainties due to their promising businesses, strong competitive positioning, deep pockets and flawless execution.
Apple (NASDAQ:AAPL) for one, is a blue-chip stock that comes close to a defensive stock. The tech giant’s stock did come under pressure in the recent market-wide downturn. However, its underperformance was far less severe than many others in the industry.
Companies with diversified businesses, such as Berkshire Hathaway (NYSE:BRK-A,NYSE:BRK-B) can also serve as defensive stocks, as outperformances in certain businesses can help offset the setbacks faced by the other businesses.
Healthcare stocks, specifically biopharma companies, qualify as evergreens. This is because their products and services are sought after irrespective of what is happening with the economy and markets. Utilities also qualify as defensive stocks due to their ubiquitous need and their ability to pay stable and relatively high dividends to investors.
On the date of publication, Shanthi Rexaline did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.