Your Wealth

Investment Safe Havens

Your Wealth - Focusing solely on preservation of capital for the retail investor.

Times like these beg the question, what is a “safe haven?” This article won’t address how, when, and where to use them, but simply if they exist and if so, what they are. The critic will surely give a rebuttal, think about inflation, taxes, lost opportunity costs versus equities, etc., claiming the “safe haven” still possesses “risk.” That’s a valid point, so here is a breakdown focusing solely on preservation of capital for the retail investor without such influencing factors.

Cash – Cash or cash equivalents would include checking, savings, and money market accounts. The national average bank interest rate today on a checking account is 0.06%, for a savings 0.09%, and for a money market 0.16%. It is true that 0.06% is very close to zero, but it is still better than what happened to many investors earlier this year, and enough to make it the best performing asset class in all of 2018. Such accounts at FDIC insured banks are also protected up to $250,000 in the event of a bank failure. 

TIPS – Treasury Inflation Protected Securities. They are a type of Treasury issued by the US government in which the principal rises in relation to inflation, the CPI (Consumer Price Index). TIPS are issued with maturities of 5, 10 and 30 years with as little as $100. At maturity, the investor cannot receive less than his/her principal; this protects against a deflationary environment during the investment. 

Certificate of Deposit (CD) – The national average today for a one-year CD is 0.45% and for a 5-year CD 0.67%. These instruments can also be FDIC protected.

Bonds – Credit rating agencies like Standard and Poor’s or Moody’s rate debt with letters, and bonds with a rating between “AAA-BBB” are considered investment grade. Currently, the US Corporate AAA Effective Yield is 1.85%. Anything rated below BBB would be considered high-yield, or junk, synonymous terms that often mislead average investors. The rating speaks to the likelihood of a company defaulting on that debt. Bonds receive interest and a promise from the issuer to repay principal upon maturity; they are also senior to stocks in liquidation. 

Fixed Annuities – A fixed annuity is an insurance contract backed by the issuing insurance and annuity company that promises a rate of interest and return of principal upon maturity, similar to a CD. There is typically a minimum guaranteed interest rate, although the interest rate received can be higher during the life of the annuity. 

Gold – Everyone has seen plenty of commercials touting gold’s ability to hedge against the Armageddon scenarios they often illustrate. However, an investor need only look at any chart on the historical price of gold to realize its incredible volatility. While there is some evidence that gold acts differently than the stock market, and often rises during periods of instability, it has not been shown as a sound hedge against inflation or currency risk and remains speculative. 

 Whole Life Insurance – Many people do not consider life insurance as a “safe haven,” merely observing the death benefit for heirs, but owners of Whole Life can recognize their cash values doing just that. Premiums paid can be a great form of reducing risk as cash values grow tax-deferred at a guaranteed interest rate plus the opportunity for dividends.

About the Author 

Bryan M. Kuderna, CFP®, RICP®, LUTCF is the host of The Kuderna Podcast, author of Millennial Millionaire, and founder of Kuderna Financial Team, a NJ-based financial services firm. 

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