Investors have been on a crazy ride this year. In addition to being the year when a roll of toilet paper is more dear than a gallon of oil, it's also been the year of more marketwide trading halts than you'd normally see in an entire decade.
There is hope, though: Since mid-March, "central banks, national governments and others have all responded , and markets have found their footing," says Tim Shaler, economist-in-residence at iTrustCapital in Newport Beach, California. "But there is now a legitimate concern that policy makers will overshoot and allow some global inflation."
While firms such as iTrustCapital saw new account balances increasing by 78% between March 15 and April 10, many investors are seeking more stable, or "safer," investments for their portfolios. Here are three safe investment options right now:
-- The "utilities of the future"
-- Health savings accounts
"In the past, investors could and largely (did) turn to cash and fixed income for the defensive elements of their portfolios," says Richard Hayes, CEO of The Perth Mint, a Western Australian government-owned precious metals enterprise and custodian of the Perth Mint Physical Gold ETF (ticker: AAAU). But with " U.S. Treasury bond yields suggesting we could be in a low to negative real interest rate for at least another decade," he says, "many of these assets are likely to deliver negative real returns for the foreseeable future."
As a result, gold may take on a larger role in diversified portfolios.
Gold is traditionally negatively correlated with U.S. stocks when markets decline, as we saw in the first quarter of 2020. "When equities have sold off, gold has tended to rise, providing balance at the portfolio level," Hayes says. The result is investors who hold both stocks and gold have seen lower volatility than stock investors alone.
On the flip side, he says gold has historically been positively correlated with stocks when they rise. So while it may not rise as high as stocks, gold does tend to contribute to portfolio performance in rising markets, he says.
But gold is not without its risks; it has historically been more volatile than U.S. stocks. From the end of 1999 to the end of March 2020, "the annualized volatility of the S&P 500 was 14.8%, with gold only slightly higher at 16.4% over the same time period," Hayes says. He points out, however, that more of its volatility has been driven by sharp upward swings as opposed to steep declines.
The 'Utilities of the Future'
Alex Ely, Macquarie Investment Management's New York-based chief investment officer of small-mid-cap growth equity, says now isn't the time to hide behind safer investment options; it's a "time for growth and risk."
"We believe the equity markets are poised to move up significantly as digitalization accelerates," he says.
As the economy recovers, he says Macquarie Investment Management believes the equity markets could hit new highs, even before there's a vaccine.
"Trying to stay safe may make these investors miss out on lots of opportunities," he says.
While smaller companies usually outperform coming out of a recession, he points stock investors with an appetite for a little more risk to larger and more stable firms such as Microsoft ( MSFT), Amazon.com ( AMZN) and Apple ( AAPL), which he calls the "utilities of the future."
These three names make up a significant part of the large-cap stock market indices. "(They're) leaders in the accelerating trend of the digitalization of most consumer and business activity," says Ely, adding their recurring revenues give "their business models better stability and visibility."
Health Savings Accounts
Safety can come from not just which investments you use, but also where you keep those investments. No matter how safe an investment is, if unexpected expenses force you to sell it, you could be stuck with a loss.
The recent health scare "has shined a spotlight on the need to be prepared for unexpected medical costs," says Rob Grubka, president of employee benefits at Voya Financial. To this end, he points investors with high-deductible health plans to health savings accounts.
HSAs "can be a smart option for investing during uncertain times," he says, by helping "individuals take control of their health and financial wellness needs, while also providing an attractive investment opportunity with markets down."
You can make tax-deductible contributions up to the annual limits ($3,550 for individuals and $7,100 for families in 2020, with a $1,000 catch-up contribution for those 55 or older). Then, money withdrawn to pay for qualified medical expenses comes out tax-free.
In the meantime, you can invest it in mutual funds similar to those found in most workplace retirement accounts, Grubka says.
While HSAs are designed for medical costs, they can be used as a retirement or emergency savings vehicle. After age 65, HSA funds can be used to pay for general living expenses without penalty -- you'd just pay taxes as you would with any distribution from a pretax retirement account.
Since HSA balances roll over every year, Grubka says another strategy for those who can cover their current medical expenses without tapping their HSA is to save their receipts and let their HSA assets grow. "Then submit this qualified medical expense receipt in the future and withdraw their HSA funds tax-free," Grubka says.
What's more: HSAs are portable, meaning you won't lose access to the funds if you lose your job. And "unlike a 401(k) or IRA, HSA contributions aren't subject to FICA taxes, and a person isn't required to take minimum distributions at any age," Grubka says. "Therefore, whether you are actively working or a retiree, HSAs offer Americans a lot of flexibility to protect their families and invest in building a secure financial future."
How Safe Should Your Portfolio Be?
Remember, no investments are without risk -- they just offer different forms of risk. "You either risk not keeping up with your required returns by increasing cash and protecting principal, or you take on more principal risk for a better opportunity to meet long-term targets," says Jason Blackwell, chief investment strategist at national wealth management firm The Colony Group.
How much you allocate to these safer investments depends on your appetite for each type of risk. You should keep six to 12 months' worth of expenses set aside, and never take on more risk than necessary to meet your goals, Blackwell says.
Ely tells investors now isn't the time to run away from risk -- it's the time to be thinking about taking it on. "The economy is recovering, and we believe the equity markets could hit new highs before everyone is vaccinated," he says. "Smaller-cap companies typically outperform coming out of a recession, so we believe now might be the time to consider taking on risk."
It's also important to remember that "safety" must be considered "at the portfolio level, not at the level of individual investments," Shaler says. Safety "comes from the 'magic of diversification,' which, when done correctly, provides higher expected return at a given level of expected volatility or a lower level of expected volatility for a given expected return."