On Friday, the stock market officially entered "correction" territory, with the S&P 500 Index ($SPX) closing more than 10% below its July peak. And while we might be in rally mode to start the week, there's plenty of reason to remain cautious as we head into a busy week for markets.
Stocks have fallen steadily over the past three months as a confluence of worrying factors is bringing market bears out of hibernation. Federal Reserve officials are talking about keeping interest rates “higher for longer” to continue fighting inflation, and the yield on the 10-year Treasury briefly rose above 5% recently, a level not seen since 2007. Investors are also concerned about escalating tensions between Israel and Hamas, and reactions to the latest round of corporate earnings have been mixed so far.
But retail investors aren't the only ones concerned; these bearish events have many high-profile investors spooked, as well. Last week, Pershing Square founder Bill Ackman acknowledged that he was covering his short bet on bonds because "there is too much risk in the world." The next day, "Bond King'' Bill Gross issued a statement on social media saying he believed the U.S. economy will enter a recession in Q4 2023 due to sticky inflation, saying, "Personally, I don’t believe Powell will be willing or able to lower short rates significantly in the face of a 3% inflation future."
With so many market concerns — falling stocks, stubborn inflation, geopolitical tensions, and calls for recession — it's no surprise that many investors are in search of the best safe-haven assets to stash their capital right now.
How to Pick the Right Safe-Haven Asset for Your Portfolio
A “safe-haven” asset can be anything that investors believe will maintain its value — or, ideally, outperform the market — while other investments are sinking, making it a reliable place to park money during volatile market periods. Traditionally, in times of trouble, we see a flight to safety in a few specific asset classes — gold, bonds, and dividend stocks.
But are those the best ways to keep your money safe in today's specific market environment? Here's what you need to know about these safe-haven assets, and why you may also want to consider one historically volatile alternative that major companies and billionaires are turning to instead of the usual choices.
Gold: The Quintessential Safe-Haven Asset
Gold has been a symbol of wealth and store of value for ages - not just for its gleam, but for its rarity and resilience. When economic or political storms brew, many investors turn to this precious metal for safety and as a hedge against inflation. That's because gold's value isn’t anchored to earnings or economic growth, but its scarcity and universal appeal.
In numerous economic downturns, gold has outperformed while other assets struggled, reinforcing its reputation as a safe-haven asset. While it doesn't guarantee immunity from market volatility, its long track record suggests that gold often shines the brightest in times of financial distress.
Remember the 2008 financial crisis? Banks were struggling, and central banks around the world were printing money like it was going out of style. Many investors sought refuge in gold, and by late 2011, its price had soared more than 130%, reaching record highs and reflecting heightened economic uncertainty.
Fast forward to 2023, and gold's appeal remains strong. With Middle East tensions rising, December gold futures (GCZ23) are blazing a trail above $2,000 per ounce. today.
Looking to add some gold to your portfolio? While many gold bugs prefer to own physical gold (like bars and coins) that they purchase from coin dealers, precious metal shops, and banks, that can come with some hassles - like finding a safe place to store it. The easiest way to invest in the yellow metal is purchasing shares of a gold ETF, which represents a stake in gold bullion and mirrors gold's price movement. The largest and most established of these funds is SPDR Gold Shares (GLD), although there are many others on the market, including one that allows you to redeem your shares for physical gold.
Bonds: Historical Market Hedge May Now Be a Loser
Bonds are debt securities issued by entities, such as governments or corporations, that pay interest to investors and return their original principal amount when they mature. Essentially, they're like an IOU (with interest) from the government or company to the person buying the bond.
However, not all bonds are created equal, with some being far less risky than others. For example, Treasuries are fully backed by the U.S. government, so their odds of default are extremely low, making them fairly risk-free and generally not very volatile. Similarly, there are other highly-rated corporate and government bonds that are also considered to have very low risk. These bonds are often treated as a safe-haven asset.
In fact, bonds were considered so safe that, for a long time, the rule of thumb was to move from equities into bonds as you get closer to retirement as a way to protect your nest egg.
However, due to the large fluctuations occurring in bonds and the dramatic flattening of the U.S. yield curve, this asset’s safe-haven status is being called into question. Since the beginning of the year, long-term government bonds have dropped by nearly 20%, while the S&P 500 and gold have both climbed about 8%.
Not necessarily the safest haven. Even so, some investors have continued to flock to bonds in times of economic uncertainty (see the recent banking crisis).
Still want to protect your portfolio with bonds? Here's what to do next. Bonds don't trade on a public exchange like stocks. If you’re looking to own U.S. Treasuries, you must buy them directly from the government at treasurydirect.gov. Corporate bonds must be bought and sold "over the counter," which means you must interact directly with a broker. Because of this, many investors find the easiest way to invest in bonds is through ETFs like iShares U.S. Treasury Bond ETF (GOVT) and iShares Aaa-A Rated Corporate Bond ETF (QLTA).
Dividend Stocks: The Oracle of Omaha's Favorite Haven
Warren Buffett is famous for a few things, including being the greatest investor all time and saying his favorite holding period is "forever." Another one of Buffett's favorite things? Dividend stocks.
More than half of the stocks in Buffett's Berkshire Hathaway (BRK.B) portfolio pay a dividend, with several of them yielding 4% or higher.
If you have time for your investments to bear fruit, dividend stocks can be a solid long-term asset. In fact, dividends alone have accounted for about 40% of total stock market returns since 1930. They've also historically held up relatively well during recessionary periods, according to Morningstar data.
Theoretically, companies that pay dividends typically have enough excess cash flow to continue making payments year after year, which is an important factor for companies in times of recession. Companies that have enough extra cash to give out regular dividends are usually seen as less risky, mainly because they're financially steady. Plus, the dividends they give can act like a safety net. If their stock price drops, those dividends can help make up for some of the loss.
However, like investing in bonds, this is a time when the highest yield isn't always the best choice. Many companies with ultra-high yields are very risky, and the huge dividend is meant to be a sweetener for taking on the extra risk.
When it comes to investing in dividend stocks as a safe-haven asset, you'll want to focus on high-quality companies that have demonstrated a long history of consistent dividend payments, and preferably dividend growth.
The best way to seek safety in dividend stocks? Simply buy shares, either of individual dividend payers or a dividend ETF, and hold them in your portfolio. There are a number of ETFs focusing on companies that pay dividends - but if you want high-quality companies dedicated to their dividend policy, you can't do much better than S&P 500 Dividend Aristocrats ETF (NOBL) . It's the only ETF that focuses exclusively on the S&P 500 Dividend Aristocrats — high-quality companies that have not just paid dividends but grown them for at least 25 consecutive years, with most companies in the portfolio doing so for 40 years or more.
Bitcoin: The Newest Safe-Haven Asset?
When you hear people talk about Bitcoin (BTCUSD), your first thought probably isn't, "That's a solid safe-haven asset." The cryptocurrency is better known for its speculative volatility.
And yet, for the past three years, you'll find that Bitcoin has outperformed the traditional safe havens like gold and bonds; its price is up nearly 370% since January 2020 (a period that includes the early 2020 recession), while the SPX and GLD have both gained approximately 25%. Meanwhile, the iShares 20 Plus Year Treasury Bond ETF (TLT) has dropped nearly 40%.
A number of analysts have pointed out that Bitcoin shares a similar element of scarcity to gold — one of the factors that makes the precious metal such a good hedge against economic turmoil. In fact, Bitcoin was originally designed to be resistant to inflation and has been deemed "digital gold."
So, is Bitcoin the safe-haven asset of the future? As it gains in legitimacy, the answer points toward yes, with a number of companies, as well as billionaires (Mark Cuban, Elon Musk), converting their cash reserves into cryptocurrency. That's a major sign of confidence that these coins will at least maintain their value, if not appreciate — the exact definition of what investors are looking for in a safe-haven asset.
Want to keep your wealth safe in crypto? Unlike the other assets discussed in this article, there aren't many ETFs offering one-to-one exposure to Bitcoin. The Securities and Exchange Commission (SEC) is still in the process of evaluating whether it will approve ETFs that own the cryptocurrency directly, but it's starting to look like we may soon see a spot Bitcoin ETF. Earlier this month, the District of Columbia Court of Appeals ruled that it was wrong for the SEC to reject a proposed bitcoin ETF, and it appears the SEC has no plans to appeal the ruling.
In the meantime, the best way to directly profit from gains in Bitcoin's price is to own it directly. To do so, you'll need to first set up a digital wallet (offered by many brokerages and Coinbase), then navigate over to a cryptocurrency exchange where you'll purchase coins. The three most popular exchanges are Coinbase (COIN), Binance, and Kraken. Once you've confirmed your Bitcoin purchase, you can either continue to store your coins on the exchange or transfer them to your digital wallet, where they'll be protected if the exchange ever faces issues or is hacked.
On the date of publication, Meredith Margrave did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
