What Is a Safe Haven Asset?

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It's called a safe haven for a reason. What you see is what you get.

But let's remember one principle: in markets, people take more risk for more potential reward. So the riskier an asset is, the more it is expected to return. You're hopefully compensated for the risk you're taking. The safer an asset is -- or the more likely it is that the asset will return what it says it will return -- the lower that expected return is.

Let's use an analogy. You want to cross a crowded street. There better be a good reason for taking that risk. Maybe being on time to your destination means you don't miss breakfast at your favorite deli. That's a pretty good reward.

So you might say, 'if I'm getting a premium return in riskier assets, why would I ever buy a safe haven asset?' The answer is that riskier assets are just that; risky. They may not return what they have the potential to return.

Stocks are the best example. A company's earnings can shoot higher if the company has a great strategy or if the economy is hot. But earnings can take a nosedive if management's strategy is a failed one or if the economy runs cold.

When investors think there's serious risk to earnings, they pay a lower price. The expected return is lower, so in order to reap the same returns as previously anticipated, price must come down.

That's usually when investors buy up safe haven assets, like treasury bonds.

Treasury bonds are issued by federal governments. Bonds promise a set schedule of fixed dollar amount interest payments, plus the amount paid to own the bond by the end of the term.

First off, bonds are promissory. Stocks are not.

Secondly, some bonds, like corporate bonds or mortgage bonds may not be paid in full if the issuer's credit fails.

But government's have almost zero credit risk. Can you imagine if the U.S. government said we may not have the cash to cover out debt payments? That would be crazy.

To see the rest, watch the quick video above. 

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