Feeling Cautious? Consider Safe-Haven Investments Deric C. Bowden, MBA In case you hadn't noticed, the investment picture has been unsettled in recent years. Many stocks have had a bumpy ride, and the bond picture remains uncertain as interest rates have dropped to their lowest levels in many years. With investment experts continuing to offer differing opinions on which direction the market will go, many cautious investors may still be looking for so-called "safe haven" investments - assets that have traditionally provided stability in times of market volatility. Although a well-balanced portfolio is the best strategy for dealing with a variety of market conditions, safe-haven investments may still have a place in your diversified investing plan. Here's a closer look. Treasury Inflation-Protected Securities If you're looking for a medium- to long-term safe-haven investment, the U.S. Treasury offers Treasury inflation-protected securities (TIPS), which have a built-in defense against inflation. Not only are TIPS backed by the full faith and credit of the U.S. government, they're also protected against the effects of inflation, which can wreak havoc on investors who rely on their portfolios to provide a fixed income. When you buy a TIPS bond, the interest rate is fixed, but the bond's underlying principal is adjusted twice annually to reflect changes in inflation. When the bond matures, you get back your original investment plus the inflation adjustments. When investing in TIPS, it's important to keep tax implications in mind. With TIPS, you essentially pay taxes on inflation-adjusted gains before you receive your inflation-adjusted earnings at maturity. You may be able to alleviate this problem by investing in TIPS through a tax-deferred retirement savings account, such as an individual retirement account (IRA). Using this strategy means you won't pay taxes on your earnings until after you start withdrawing funds from your tax-deferred account. Inflation-Indexed Bonds Provide Tax-Deferred Benefits The U.S. Treasury also offers Series I Bonds, or I Bonds, which can help protect against inflation through certain tax-deferred advantages. I Bonds are sold at face value and grow with inflation-indexed earnings for up to 30 years. The difference between I Bonds and TIPS is that, with I Bonds, the Treasury factors inflation into the interest rate instead of the principal, as is the case with TIPS. The interest earned is free of state and local taxes, but federal taxes are due when the bond matures. The I Bond features two rates: A fixed rate of return, which is set when you buy an I Bond. A semi-annual variable interest rate that changes twice a year, based on inflation as measured by the Consumer Price Index (CPI). Inflation adjustments are made every May and November. So, for example, if you buy an I Bond today with a fixed rate of return of 2%, you will earn 2% interest plus an additional return equal to the CPI-measured inflation rate, which is currently at about 3%. In total, your I Bond would earn about 5% interest. If inflation rises, your return goes up accordingly. If deflation occurs, the I Bond's variable rate can bring your total return down to, but not below, 0%. Add Diversity with Real Estate Trusts If you're comfortable with a little more risk in your safe-haven investments, you might want to consider a real estate investment trust (REIT). As publicly traded companies that invest in real estate or mortgages, REITs generally pay high dividends because they are required by law to pay out 90% of their net income to investors. Because REITs are largely based on the performance of the real estate market, they can provide a good tool for adding diversity to your investment portfolio. REITs have a low correlation rate with stocks and bonds, meaning the performance of REITs is usually not connected to the peaks or valleys of the stock market. And, thanks to their dividend payouts, REITs are often less volatile than other investments. You can purchase REITs either individually or through a mutual fund. It's important to remember, however, that REITs do carry a certain amount of investment risk. As with stocks and bonds, REIT investors run the risk of losing principal. Diversification Is Your Best Defense As you consider which safe-haven investments might be right for your financial situation, it's important to remember that investors can also get into trouble by keeping their investment portfolios weighted heavily in one particular asset class, such as stocks, bonds or cash equivalents. Because each asset class has its own blend of risks and rewards, focusing on one particular asset class may expose your portfolio to a higher level of risk. Diversification - spreading the investment dollars in your portfolio among multiple assets and asset classes - can help you moderate risk and increase your portfolio's earnings potential. To properly diversify your portfolio, consider a mix of assets based on your financial goals, risk tolerance and investment timeline. Your professional financial advisor can help you in this process, working with you to ensure that your portfolio is sufficiently diversified to meet your long- and short-term financial goals. Deric is a former Army officer and current financial advisor with American Express Financial Advisors Inc. For questions or comments, contact Deric at: Deric.c.bowden@aexp.com. This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. Investments are not guaranteed and are subject to investment risk including the possible loss of principal. American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Back to Top