Here is one term market action in recent years has proven utterly, entirely meaningless: Safe haven.
This isn’t exactly breaking news, and we certainly aren’t arguing this is some revolution—there has never been a safe investment, one devoid of any and all risk. The risks simply vary. Yet whenever volatility arrives or folks fear volatility arising, rest assured that some pundit somewhere will be quick to claim safe assets or safe investments or safe havens are a thing. So these days, some seem to seek far and wide for a new safe haven to replace those just proven unsafe. As an investor, the key is to not delude yourself into thinking any investment is risk-free. Every investment ever in the world has expected risk and return characteristics.
What’s triggering the replacement-haven hunt? In part, it’s the Swiss franc. Prior to last month, the franc was commonly presumed safe. Then Swiss National Bank deleted its currency floor and volatility ensued. Now, the volatility following the removal of the euro floor was upward, but this doesn’t mean it’s now safe and high-returning. Volatility is volatility, and we’d assume one seeking a safe haven doesn’t want a lot of that. So not so safe, probably.
Two other safe havens, gold and silver, are in the throes of bear markets. Gold is down -34.9% since its early September 2011 peak.[i] Silver is down -65.5% since early May 2011.[ii] Neither exactly signal safe shores from volatility, particularly since stocks are up significantly over the same period.
Maybe you suggest those are cherry picked. Let’s keep going! Fiscal stalwart and commonly presumed safe haven Germany’s sovereign bond yields are negative through 6-year maturities! You’ll pay the Swiss government half a percentage point for the privilege of lending them your cash for the next five years. They’re nicer if you lend to them for 10 years—it’s free![iii] But act fast! That 0.0% yield is up from negative rates seen just a day earlier. Finland auctioned newly issued 5-year debt at negative yields recently. French yields are squarely in the red.
Now, maybe you’re an American and presume foreign means risky and that’s the problem. But if the dollar is more your safe haven of choice, consider: After accounting for inflation, you’ll need to lend to the US government for at least 3 years to earn a yield exceeding inflation. (Exhibit 1)
Exhibit 1: Real US Sovereign Bond Yields
Source: Federal Reserve Bank of St. Louis, 02/28/2010 – 02/10/2015. Rates shown are the US Treasury yield minus the year-over-year percentage change in Consumer Price Index for all Urban Consumers.
Think that’s doable and safe? What if interest rates rise? Remember: Bond yields and prices move inversely. That means if rates inch up from current historical lows at some point while you own the bond, you’ll take it on the chin. But is it worth it to lend to the government for three years at 0.77%? Or 10 years at 2.0%? Move away from government bonds and you introduce more credit risk—bond prices can and do experience volatility, and that applies to municipals and corporates.
But maybe the problem is just with gold, silver, certain currencies, and US, German, Swiss, French and Finnish bonds.[iv] What about CDs, cash and cash alternatives? Aren’t they safe? Well, no. What’ll you do with that cash? Think money market funds are permanently safe? We have three words for you: Reserve Primary Fund. How about cash alternatives? Google auction-rate preferred and you’ll find these so-called liquid, cash-like investments proved anything but safe and cash-like during 2008’s financial crisis. CDs and savings accounts today yield next to nothing, and less than nothing after factoring in inflation. These are perfectly valid instruments to use if your money is earmarked for a major purchase or expense that’s imminent. But if your goals and objectives are longer term in nature, or if you require growth, they are probably not right for you.
We’re not suggesting that stocks are always and everywhere the bee’s knees. Just that folks’ endless quest to find something safe is really just setting themselves up for disappointment. Take a more rational view—a more nuanced view. There isn’t risk-on and risk-off.[v] There isn’t safe and unsafe. There are only different flavors of risk and return, pure and simple. Figuring out the one that works best for your goals is the key.
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[i] Source: Factset, Gold returns 9/6/2011 – 02/10/2015.
[ii] Source: Factset, Silver returns 05/02/2011 – 02/10/2015.
[iii] Swiss 10-year sovereign bond yields were 0.00% as of 02/10/2015.
[iv] There are more with negative yields too.