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Investors want havens and for good reasons. New waves of coronavirus, a crucial U.S. presidential election and simmering trade tensions are just a few of the worries lining up to test our collective nerves over the next few months.

So where to turn? The standard strategy of taking refuge in bonds and guaranteed investment certificates looks unappetizing when yields are at today’s subterranean levels.

As always, the investment industry stands ready to help – for a price. The problem is that some of its most commonly recommended notions come with their own flaws. Anyone looking for havens should be aware of their potential pitfalls. For instance:


Bullion has enjoyed an excellent year, with prices up more than 24 per cent since January. However, the yellow stuff has been losing its lustre in recent weeks and is down significantly from its August peak.

Maybe bullion is slipping because the U.S. dollar is strengthening. Maybe it’s losing ground because inflationary fears are easing. Or maybe it’s falling just because it’s falling.

Gold rides erratic waves of sentiment – and not always in the way that gold bugs think. To see how it has performed in past episodes, any would-be bullion buyer should devote an hour to perusing The Golden Dilemma, a classic 2013 research paper by portfolio manager Claude Erb and Campbell Harvey, a Canadian economist who teaches at Duke University.

Their paper demolishes many of the common rationales for investing in gold. Consider, for instance, the notion that gold is an effective hedge against inflation. Mr. Erb and Mr. Campbell show that history doesn’t support that happy fable – at least not if you measure results in any unit of time smaller than a century.

So where does that leave us? Mr. Erb and Mr. Campbell acknowledge that gold can help diversify portfolios. And, yes, its price could rise if emerging markets decide to load up on it. All of that can make bullion an interesting speculation at times. But a haven? Think again.


If gold strikes you as an old fogey type of haven, you can always look at high-tech alternatives: bitcoin, for instance.

Fans of the 12-year-old cryptocurrency praise its ability to operate outside of government. In theory, it offers people who are nervous about the financial system a way to buy a store of value that is independent of the usual authorities.

Well, sort of. Bitcoin’s appeal depends in large part on how persnickety you get about defining “store of value.”

Over the past five years, the cryptocurrency’s value has gyrated wildly, soaring to nearly $18,000 in late 2017, then falling below $5,000 a year later. This year it has staged an enormous rebound, gaining 50 per cent in value and rocketing above $14,400.

What has been driving this year’s boom? No one knows. Bitcoin is secretive by design while the crypto market as a whole is a murky place with few disclosure requirements or other safeguards. Crypto fans see that as a virtue.

Others may not agree. Consider the collapse of Canada’s own Quadriga cryptocurrency exchange in 2018. Investors lost at least $169-million in what the Ontario Securities Commission called “an old-fashioned fraud wrapped in modern technology.”

One theory holds that bitcoin’s recent rise is powered by crypto speculators who are racking up big gains in other cryptocurrencies, then parking it in bitcoin, the most established of the cryptos. Barron’s columnist Jack Hough jokes that this makes bitcoin “the reserve currency of La La Land.” That’s funny – and accurate. But a haven? Think again.

Portfolio guarantees

Skittish clients are bad for business. No wonder then that banks and investment companies have devised several products to soothe the nerves of worried investors. These products come in many different wrappers, but they all promise to protect you from potential losses while still allowing you to benefit from stock market gains.

This sounds like a fine deal indeed. The problem, though, is the cost of the protection. Investors typically wind up paying through the nose for whatever insurance they get.

Consider the three-year TD Canadian Banking and Utilities GIC, one of a series of Market Growth GICs offered by Toronto-Dominion Bank. This particular guaranteed investment certificate allows you to “earn up to 12 per cent … without risking your principal investment,” according to the promotional material on the bank’s website.

What the marketing bumf doesn’t stress is that the maximum 12 per cent return is not an annual figure. It is the total return for all three years, which works out to a compounded maximum return of slightly less than 4 per cent a year.

Remember that is the best case. Actual results are tied to the performance of two indexes – one tracking Canadian bank stocks, the other following utilities stocks – and may fall considerably short of 12 per cent. In a worst case, you could receive a total interest payment of only 1 per cent in exchange for locking away your money for three years.

The biggest catch of all is that you don’t receive dividends from the banks and utilities you are betting on. That is a considerable sacrifice since banks and utilities generally have dividend yields in excess of 4 per cent. If the past decade is any guide, surrendering dividends means you are giving up a big chunk of whatever total return these stocks will generate.

For anybody but the most risk averse investor, it is hard to see the benefits of the TD product. Banks and utilities are already stable, conservative investments. Their lush dividends are a major reason to hold them. Sacrificing those dividends is a hefty price to pay for whatever small increment of safety the GIC provides.

To be fair, other risk-reduction products also charge a hefty premium for safety. For instance, the put-and-call strategies touted by some advisers, use options to trim potential losses. Once you add up the cost to implement these strategies – including fees and forgone dividends – it is not clear how much benefit they are providing.

“Buffer” exchange-traded funds, which offer protection against a preset portion of the market’s losses, invite skepticism, too. These ETFs charge substantially higher management expenses than plain-vanilla products. Plus, they require investors to forgo dividends and cap potential gains.

The most benign way to view such risk-reduction products is to see them as a reasonable option for people who, for whatever reason, want a short-term way to remain invested in markets they think are expensive and likely to fall.

Of course, that raises the deeper question of why you want to be invested in assets you think are overvalued.

Financial history suggests the best way to reduce risk isn’t to take refuge in any single haven, but to maintain a broadly diversified portfolio. You can easily achieve such diversification with the all-in-one asset-allocation ETFs offered by Vanguard Canada and the iShares unit of BlackRock.

If that doesn’t appeal, you could simply take some risk off the table. GICs and short-term bonds aren’t offering much in the way of payoffs these days, but they do deliver safety. If that is what you crave, the old standards still deserve a look.

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