Where can you keep your money where it will be safe!? That’s what many investors are asking themselves right now. They are looking for safe haven assets and weighing their choices. Today we will review options such as T-bills, bonds, gold, bank products, and our favorite safe haven asset!
But first, let’s be clear about what is NOT a safe haven asset:
It’s not a more “conservative” stock portfolio. The S&P 500 is down a whopping 22% in one month, but we’ve seen losses in virtually every sector. Industries that usually provide stability or profits during times of volatility and recession are only faring a bit better:
- Consumer staples are down 16 percent in one month.
- Grocery chains are down as much as 10 percent in one month.
- Alcoholic beverage stocks are all well into double-digit losses.
- Funds focused on generating dividend income are down 21 to 25 percent (which makes the roughly 3 percent in dividend income rather useless).
It’s not “sticking with the plan.” A frightening number of people are declaring on social media that they plan to just keep doing what they’ve always done… buying a broad stock market index, month after month. They recite such slogans as “the market always goes up over time” and “stocks are on sale now!”
While there may be some measure of truth in those statements… it makes no sense to NOT reposition assets when the economic indicators are clear. That would be like walking in a blizzard wearing a t-shirt and sandals because that’s what you normally wear!
Home equity is also a terrible “safe haven.” There are risks to prepaying a mortgage—especially in uncertain times. The last place you want to store your cash is in the walls of your home. Once you send your money to your lender… good luck getting it back!
Now is a terrible time to take risks and a good time to have a portion of your money as liquid as possible for both emergencies and opportunities. We will likely see layoffs, business closures and also plenty of “deals” on real estate and other assets in the coming months. So keep your money safe… and available! With that in mind, let’s look at potential safe havens assets for YOUR dollars… the good, the bad, and the ugly.
Treasury Bills and Bonds
Treasury bills (aka T-bills) is a short term security (less than 52 weeks) issued by the government. They function similarly to a very short term bond. T-bills are considered a conservative cash equivalent, and the resulting gains are predictable.
In some economies, T-bills pay more than savings accounts. But in this environment, we see no advantage to them, as you can obtain far better rates at an online bank or (perhaps) a credit union.
Treasury bonds (aka T-bonds) are long-term government bonds, available for 10, 20 and 30 years. They pay interest twice a year and provide greater earnings than bank CDs in some environments. But 10-year T-bills just dropped to an all time low this week of .318 percent. Why anyone would take that deal is beyond us!
Muni-bonds have generally been considered a tax-free safe haven, although recent bankruptcies should make investors cautious. In June 2019, a Bloomberg headline read, “Buyer beware of states with a high number of muni bankruptcies.“ (Apparently, Nebraska, California, and Arkansas are not good bets.) Yet, as the article illustrates, many states have been home to municipal bankruptcies in recent years. (And we expect this trend would increase in a recession.)
Not only has risk increased for muni bonds, returns have decreased. According to fmsbonds.com, AAA rated municipal bonds are now paying just .85% annually for a 10-year maturity and 1.25% for 20 years. We would definitely not recommend locking up your money at those rates!
Corporate bonds tend to pay more than the choices listed above, but we cannot recommend investing in corporate debt. There was already a bubble in the corporate bond market which has reached an all time high of $10 trillion—47 percent of GDP!
Fueled by rock-bottom interest rates that followed the 2008 meltdown, this bubble has been growing for some time. The Washington Post calls it the “corporate debt bomb,” observing, “Access to low-cost credit helped many companies grow and hire. But it also enabled some that weren’t profitable to survive by repeatedly refinancing their debt.”
There has also been a significant increase in borrowing by firms with the lowest-quality investment grade — those rated just one level above “junk.” And “more than $1 trillion in ‘leveraged loans,’ a type of risky bank lending to debt-laden companies, is a second potential flash point.”
So what happens when an international health crisis hits the world and supply chains are disrupted, consumer spending plummets and investors lose confidence? The corporate debt bomb is positioned to “blow a hole in the U.S. economy,” says WaPo. The flight from the stock market is being blamed on “coronavirus fears.” Yet it may have more to do with people realizing they are invested in companies about to be battered in a recession—or sustained by cheap debt with little-to-no actual profits.
Bond Funds and ETFs
There can be problems with bond funds and ETFs in a volatile market. While funds and ETFs trade like stocks, they hold assets that are not liquid. Before you trust your dollars to a bond ETF, listen to Hari Krishan of Doherty Advisors explain why that could be a terrible idea. He reveals why bond funds aren’t the safe strategy people imagine and can be susceptible to flash crashes.
Savings Accounts and Certificates of Deposit
Don’t bother opening a savings account with the well-known big bank—it’s likely paying .1% interest or less. (That’s not 1%… That’s 1/10 of one percent!)
Internet banks such as Marcus and Ally and some regional credit unions offer high-yield savings accounts currently paying around 1.6%. This is a good choice for short term savings and the portion of your emergency that you want to keep liquid.
Bank CDs are a popular solution for cash. The main advantage is that bank CDs typically pay more than savings accounts. However, they still don’t pay very well. Plus you have some loss of control as you’ll be penalized for early withdrawal. If you go this route, consider a penalty-free CD with an internet bank. You might get 1.6 or 1.7 percent… not great, but it helps counteract inflation.
Money Market Accounts and Funds
Money market accounts and money market funds are actually two different things, although they are often confused with the similar names and features. Considered a safe place for cash, they both can pay 1 to 2 percent, although many pay less.
Money market accounts are issued by banks and are typically FDIC insured. Money market funds are purchased from investment brokerages and are not guaranteed (though considered safe). (Read more about the types of money markets.)
Gold can be an effective hedge against a falling stock market or a falling dollar and it has a long history as a store of value. Of course, there is no guaranteed rate of growth or return, and the value is unpredictable. This week, we saw the price of an ounce of gold hit $1700 for the first time in 7 years, then drop more than 7 percent to below $1600.
A small amount of gold is fine in your portfolio, but we strongly encourage people to not get carried away with it. It’s not liquid, it has no guarantees, and it produces no income. Holding physical gold may also incur costs (if you pay a company to store it for you).
So if you do consider buying gold, ask yourself the question, “And then what?” It’s good to consider what your exit strategy would be. Some people just hold a bit of gold as an “insurance policy” against economic collapse. But the dollar remains a relatively strong currency and physical gold remains an asset that cannot guarantee growth nor produce cash flow.
Also note that gold is often sold by those saying the sky is falling and the dollar will fail. However, you can’t take your Krugerrands down to the local store to purchase food, nor can you easily use gold to pay your mortgage! That’s why we favor a different safe haven.
Whole Life Insurance: A Proven Safe Haven Asset
Whole life insurance is a time-tested safe money solution. It is definitely not for everyone, but it should be considered by anyone who:
- wants a long-term savings vehicle that can outperform bank rates
- desires access to money for emergencies and opportunities
- values leaving a legacy to a spouse, heirs or non-profit
- is able to save money regularly (annually or monthly)
- and is healthy enough to qualify for life insurance.
Whole life works well in conjunction with a high-yield savings or money market account that you use for short-term savings and smaller emergencies. Policy cash value tends to outperform bank savings rates by about 2 percent/year. (Right now, we see internal rates of return (after costs) between about 3.5 and 4 percent, which varies with age and health.
Investors (especially real estate investors) love whole life because they can easily borrow against the cash value when needed—while the policy continues to grow and (likely) pay dividends.
What makes whole life an excellent safe haven asset is its stability and longevity. Many whole life insurance companies have remained in business and paid dividends every year for well over a century! Dividends are not guaranteed, but they have been paid consistently in every kind of economy. The companies we work with have paid dividends:
- Through every stock market crash.
- Throughout the Great Depression and every recession.
- In spite of the Savings and Loan Crisis and countless bank failures.
- During every war and the 9/11 attack.
- No matter who was in the White House.
- And through every epidemic and pandemic.
Nothing has ever been able to stop life insurance from doing what it does, which is provide families with security and certainty—especially during trying times.
We will get into more details about how a whole life policy works in future articles. We also recommend reading Live Your Life Insurance, our little life insurance book you can find in all formats on Amazon. And we are happy to provide you with a life insurance quote in the form of an illustration. Reach out to Partners for Prosperity if we can help!