Should you invest in safe-haven assets?

In times of market turbulence, investors frequently turn to safe-haven assets like gold, but do they live up to the hype?

Investors are adopting a "wait-and-see" strategy, which has resulted in a comparatively subdued market reaction to the Middle East conflict thus far. Nevertheless, there is a feeling that geopolitical risks might be resurfacing, which might increase demand for safe-haven investments.

Following the US's directive to launch a missile strike on Iranian nuclear facilities over the weekend, the conflict between Israel and Iran has escalated in recent days. Although it appears uncertain, a ceasefire has since been negotiated.

Given that the 90-day pause on Donald Trump's "Liberation Day" tariffs is set to expire on July 8, market volatility may also be expected in the upcoming weeks.

Although the majority of Trump's country-specific tariffs were lowered to 10% during the pause, if nations are unable to reach a consensus with the US president, higher trade barriers may be imposed after the deadline.

Any actions would likely need to be priced in to account for slower economic growth and higher business costs, even though they would be less shocking this time around than they were in April. During the pause, April's initial sell-off has nearly completely reversed. This could be an overly optimistic approach, unless investors truly think Trump is all bark and no bite.

At a time when the world's economies are already struggling with high interest rates and slowing growth, geopolitical unrest and tariffs could put additional strain. The global growth outlook for 2025 and 2026 was recently downgraded by the OECD think tank to 2 percent, the lowest level since the pandemic.

Many factors will depend on your goals, time horizon, and willingness and ability to take on risk. Does this mean it's time to reevaluate the amount of risk in your portfolio, both when examining what you currently own and when evaluating the best stocks and funds to add to your investments moving forward?

Although volatility is a natural part of investing, not everyone finds a wild ride enjoyable. Rob Morgan, the chief investment analyst at Charles Stanley, stated that while the stock market is the strong force behind superior long-term returns, balancing assets can help even out the edges of a portfolio.

"This will depend on the needs and goals of the investor, but a traditional portfolio for an investor looking for a moderate amount of risk would consist of 60% shares and 40% bonds and other balancing assets.

An 80-20 split between stocks and other balancing assets may be the goal for investors who are more daring or who have a longer time horizon (measured in decades rather than years), Morgan continued.

Safe-haven assets: what are they?

At different points in the market cycle, each asset class exhibits a distinct performance. The most often given example is the idea that bonds should increase when stocks decline and vice versa. The conventional 60/40 portfolio, in which 60% of assets are allocated to stocks and 40% to bonds, is based on this theory.

This uncorrelated performance is merely a general rule. In reality, it doesn't always turn out that way. When central banks raised interest rates in 2022, bonds and stocks both experienced sharp declines simultaneously, teaching investors this lesson the hard way.

For the majority of asset classes, "safe haven" is a bit misleading, as practically all investing entails some degree of risk. Ben Seager-Scott, chief investment officer at Forvis Mazars, stated, "Even holding cash exposes you to inflation risk and some interest rate risk (in terms of growing that cash pile)."

Nevertheless, diversification can be achieved by combining different asset classes and industries into a single portfolio, which will help you better withstand a variety of market conditions.

Bonds.

Because there is very little chance of a government like the US or the UK defaulting on its debt, developed market government bonds are frequently regarded as one of the safest investments.

It's important to note, though, that bond prices can still vary significantly on the secondary market depending on variables like inflation and interest rates, so selling the asset before its term is up could still result in losses.

You might be able to make more money elsewhere because government bonds typically pay lower interest rates than riskier options. Because of this, other bond categories, such as corporate bonds, might also be worthwhile to investigate.

Corporate bonds can yield higher returns than gilts, but they are generally riskier than government bonds. Investment-grade corporate bonds are still of high quality.

According to Morgan, there is a "sweet spot" for short-dated investment-grade corporate bonds. "Enough risk and yield to provide an attractive income-based return, but with limited sensitivity to the shifting sands of inflation and interest rate expectations" is precisely how they describe themselves.

The iShares Corp Bond 0-5yr UCITS ETF might be worth a look for investors seeking exposure to this segment of the asset class. The fund monitors corporate bonds with an investment-grade rating and a redemption period of less than five years.

Gold.

The general consensus is that gold is an asset that retains its value well. During the market turbulence brought on by Trump's "Liberation Day" tariffs, many people flocked there. Additionally, the yellow metal is viewed as an inflation hedge.

Nevertheless, gold investing is by no means a foolproof strategy. History serves as a reminder that these assets are susceptible to shocks, much like stocks. Following a rally, gold fell 30% in 2013, and it dropped 50% in the 1980s, according to Seager-Scott.

Gold's diversification benefits are likely sufficient to warrant a small allocation despite this volatility. Approximately 5 percent is what some experts advise.

A physical-gold ETC is typically a low-cost and straightforward choice for gold enthusiasts. This implies that you are not required to purchase and store the yellow metal directly. Alternatively, you can use a physically-backed fund, which typically has comparatively low investment fees, to get exposure to the price of gold.

For instance, the iShares Physical Gold ETC and the Invesco Physical Gold ETC?

Absolute return funds that are balanced.

One option for those who wish to approach risk in a balanced manner is a pre-made 60/40 portfolio. If you would like someone else to handle things for you, the Vanguard LifeStrategy 60% Equity Fund is a well-liked choice.

In addition, Vanguard's LifeStrategy line offers other asset allocation splits, like 80/20, for those who wish to assume greater risk.

As an alternative, you might want to consider absolute return funds. This kind of portfolio does not adhere to a benchmark and seeks to minimize volatility while producing a positive return in all market conditions. Before investing, just make sure to check the funds' track record.

Since the fund manager isn't really investing in a wide range of asset classes, you are usually depending on their skill or alpha when using absolute return funds. Their fees are usually fairly high, and all you can do is hope that their tactics will yield a profit," Seager-Scott said.

Money.

Cash deposits are the ultimate safe-haven asset in theory because they are liquid, protected up to £85,000, and unaffected by stock market volatility, but they are by no means risk-free.

The purchasing power of your savings can be significantly diminished over time by inflation, which is a silent thief.

It would only take 36 years for the value of your nest egg to halve, which is bad news if you're planning to put it away for use in retirement, even if inflation falls to the Bank of England's target of about 2 percent.

Inflation has been significantly higher than this in recent years. The UK's inflation rate peaked in October 2022 at 11.1 percent. It would only take about six and a half years for the value of your money to drop by half at this high level.

Although it's crucial to have some cash on hand for emergencies and short-term savings objectives, you shouldn't go overboard. Look around when choosing a savings account to get a rate that beats inflation.

For the most recent offers on cash savings, view our compilation of the top easy-access rates, cash ISAs, regular saver accounts, and one-year savings accounts.

Over the past ten years, global stocks have outperformed safe havens.

Risk cannot be completely eliminated, and excessive risk aversion can also be dangerous. All investors should make sure their portfolios are diversified, but poor returns can arise from panic selling during market declines or from having too little exposure to stocks.

Investment platform AJ Bell's analysis indicates that stocks have outperformed safe-haven assets over the last ten years, despite the fact that they are more volatile. This is due to the fact that volatility over a period of years frequently becomes negligible.

For those who want to invest, a minimum horizon of five years is usually advised, but the longer the better.

Source: 10 years until December 31, 2024, AJ Bell.