There have been several financial crises where investors were looking to allocate their capital to the most confident options. Some popular investment options feature high volatility, which is undesirable regarding market turmoil. That’s why traders can invest in a group of safe assets during a financial crisis.
What are Safe Assets?
A safe asset is a financial instrument or security characterized by its low risk of loss of principal or value, usually providing a stable and predictable return.
Stable payoffs and high liquidity lure investors to turn into safe assets. Moreover, these financial instruments carry shallow credit risk. During turbulent economic periods, these assets at least endure or even improve their worth, while more volatile, such as crypto, have to deal with significant plunges.
On the SimpleFX platform, you can trade multiple financial instruments, including safe assets available on the platform.
There are several instruments treated as safe assets. Usually, they are strongly connected with stable governments, both in economic and political terms.
The main features of safe assets
Safe assets have their characteristics based on which investors can recognize them in the market:
Regardless of the circumstances, there must be an easy possibility to convert the asset to cash.
Stability of safe assets
The instruments have to be in the market for a long time to prove their stability and reluctance to financial turmoil. It also shouldn’t become outdated or replaced.
The asset’s demand has to be long-term, with no risk of potential lack of usage.
Currency Pairs Traded During Downturns
As mentioned, safe assets are strongly connected to stable governments. That leads us to some currency pairs, which investors often pick during financial turmoil.
The obvious choice is focusing on the US Dollar. The United States is well-known for its stability in both political and economic terms. It is worth mentioning that USD is the reserve currency used worldwide in finance and international trade.
But the question is: which quoted currency should we choose to pair with the US Dollar to prevent potential market volatility? The usual choices are Swiss Franc and Japanese Yen. The Swiss economy features unusual autonomy and a robust economy. Even though Japan has to deal with a significant national debt, its economy’s performance is one of the best in the world.
Gold as a Safe Asset
There are numerous reasons why gold is treated as a safe asset. One of the most significant is vibrant history, putting gold as a precious metal for generations. Investors lean towards it during uncertain economic periods, eventually improving its worth.
Pay attention to the fact that gold is not only a precious metal that investors treat as a safe asset. Silver, platinum, and palladium can also be a secure financial instrument to diversify the portfolio.
Are Equities Safe to Buy?
Usually, the answer to that question would be negative. Most of the stocks are tightly connected to geopolitical situations and events. An abstract example would be America’s economic turmoil. The plunge of the value of tech giants, such as Apple or Amazon, is very likely to happen in those theoretical circumstances.
However, investors should pay attention to specific equities during some worldwide issues. During the recent Covid-19 pandemic, healthcare stocks rose considerably. Aircraft (e.g., Boeing) and other defensive stocks are also worth considering at the time of military uncertainties worldwide.
How to Trade Safe Assets?
Investors may wonder how to trade safe assets. There are many strategies, which usage depends on various factors.
Multiple safe assets are used as a way to diversify a portfolio. Every investor should keep in mind that focusing only on a few financial instruments may result in significant losses. That attitude protects investors during market turmoil. Even though safe assets also experience fluctuations, their presence in the portfolio gives security and stability.
However, some traders are willing to close their long-term on safe assets and put their chances on other assets. If someone is sure these instruments will grow, the resignation from gold, safe-haven currency pairs, or defense equities is possible.