Investors are turning to gold and US government bonds as stock markets go through a difficult patch
Thursday 27 Feb 2020 Author: Daniel Coatsworth

The large sell-off in stock markets around the world on Monday 24 February has pushed investors towards safe haven assets as they try to avoid losing money.

Natural homes for money in times of strife include US government bonds, defensive sectors like beverages, pharmaceuticals and utilities, gold and cash. This list could also include funds that invest in infrastructure assets such as healthcare centres.

Gold has been one of the more dependable places to invest during the latest market turmoil. Its value has risen by approximately 11% year-to-date to $1,682 per ounce as the coronavirus disaster has unfolded, including a 2.4% rise at the start of this week.

In contrast, many defensive sectors saw their valuations plummet on Monday as a wave of panic spread across markets. This is a reminder that defensive doesn’t mean risk-free.

You can still lose money with these types of investments, but potentially less relative to the broader market. On the flipside, safe havens tend to lag a rising market.

ODD MARKET BEHAVIOUR

Unusually, gold has actually risen in value this year at the same time as stocks have gone up. Traditionally the metal would fall in value if stocks were rallying.

The latest price movement would suggest that recently investors have been behaving in two distinct groups – one which remained fearful and continued to buy gold, the other which has been complacent about the coronavirus risks and kept buying shares.

History suggests this recent trend of moving in the same direction had to break down at some point, which is precisely what’s happening now with gold rising and shares pulling back.

WHAT SHOULD INVESTORS DO NOW?

Investors may naturally feel compelled to shift their portfolio into gold and defensive assets. It would be a mistake to make major adjustments to your holdings simply because of a terrible day on the markets.

The only adjustments worth making are ones to ensure you have a diversified portfolio to help spread risks. It’s fine to have some gold, bonds and some defensive sectors like utilities and beverages, just don’t make them the dominant holdings as you could be giving up some key growth drivers.

If you’ve got into a regular investing habit and are feeling nervous about the current state of affairs, keep feeding your ISA or SIPP with more cash. It’s fine to temporarily sit on your hands while the cash builds up. You can put that money into the markets when you are ready.

Ultimately the best guidance we can give is to remain calm, stay invested and simply ride out the ups and downs of the market. Take a long-term view and don’t check your portfolio values on a daily basis as that could only make you worry.

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