There are many ways in which investors choose to allocate their funds. Some prefer intangible assets such as trademarks, patents and intellectual property. Others focus on financial vehicles, including stocks, bonds and derivatives. However, a growing number of market-savvy individuals are leveraging a category referred to as real assets.
In order to fully appreciate the potential benefits associated with this strategy, it is first prudent to examine these resources in greater detail. What are real assets? How do they fundamentally differ from other investment opportunities? Why are traders often drawn to these alternatives? Let us begin by developing a well-rounded real assets definition. It will then be much easier to highlight their fiscal advantages.
The fundamental principles of real assets
As the term may already suggest, real assets are investment opportunities that are tangible in nature. The intrinsic value of these assets is likewise determined by physical characteristics as well as demand. Some well-known real assets examples include:
- Commodities (such as gold, silver or oil).
- Infrastructure
- Real estate
Most economists agree that the value of a real asset is primarily derived from its real-world applications (such as the use of gold within smartphones or oil to provide energy to an entire nation). As real assets often represent the fundamental “building blocks” of an economy, it can also be argued that they are central pillars in regard to global wealth creation. However, it is still wise to highlight real assets vs financial assets in terms of their differences.
Some individuals can make the mistake of classifying real and financial assets within the same category. This likely arises from the fact that both are seen as providing intrinsic value. However, this is not exactly true.
The value of a financial asset (such as a mutual fund, an investment account or even cash) is determined by an ownership claim or a contractual agreement. However, the tangible nature of real assets is seen as providing more transparency in relation to how they perform and their overall return on investment (ROI).
The benefits of diversifying into real assets
Now that we have sufficiently discussed the inherent nature of real assets, it is crucial to emphasise the benefits that these types of assets have to offer. Investors can thereafter make an informed decision at the appropriate time.
Market stability
Perhaps one of the most important advantages of real assets is their ability to remain relatively immune from volatile market conditions. Thus, they can be used to counteract short-term volatility caused by predominant macroeconomic and/or political events. This is even more crucial in the event that a bearish pattern seems to be looming. Many investors will choose to reallocate a portion of their holdings into real assets, the ultimate intention being to stave off fluctuations that could otherwise harm the value of their portfolio.
These are some of the very same reasons why specific real assets (such as precious metals) have performed historically well in times of market turmoil. For example, the prices of silver and gold witnessed a massive surge during the protracted economic crisis of 2007-2008. This enabled real asset management professionals to provide their clients with a useful opportunity to accrue a profit without becoming exposed to unpredictable open-market conditions.
Resistance to inflationary effects
Another important windfall associated with real assets is their ability to be used as hedges against inflationary effects. Studies have consistently illustrated that these types of assets outperform bonds and global equities during periods of high inflation.
The same certainly cannot be said for the majority of financial assets, as their values can sometimes be dramatically reduced as a result of central bank policies or unforeseen global events. Not only will this cause investors to lose a significant amount of money, but the cost of purchasing financial assets will automatically rise due to the relative weakness of a fiat currency.
Please note that we are not only referring to traditional real assets such as gold, silver or oil in this sense. Real estate can likewise be tasked to stave off the effects of inflation. For example, a rental property may be used to generate an additional source of liquid income during bearish conditions. Let us also recall that investors will normally flock to real assets during times of uncertainty, once again providing a boost in their values.
Long-term growth
Real estate fund managers will often cite long-term growth opportunities as one of their most attractive qualities. This observation is quite valid, and it is just as relevant when discussing other types of tangible assets. While it is indeed true that some investors are attracted to short-term profit margins (such as Forex pairs or money market accounts), a growing number are instead migrating towards longitudinal opportunities. The main takeaway point here is that these assets provide the benefit of a passive income that is relatively stable in nature.
This is why real assets will often represent one of the core components of a well-rounded portfolio (diversification will be examined in greater detail later in this article). Even in the event that certain holdings underperform, the value of real assets may offset such losses while still accruing additional value. From holdings in precious metals to working in tandem with a real estate fund management company, those who wish to embrace a relatively conservative approach to investing will often gravitate towards real assets.
Reliable rates of appreciation
The notion of asset appreciation was mentioned in the previous section, and it warrants slightly more attention. Financial assets such as stocks and bonds can be rather unpredictable in regard to their short- and medium-term movements. However, real assets are associated with a stable rate of return on investment from a historical perspective.
For example, the price of gold increased from $330.98 (1997) to $1798.61 in 2021. While re-corrections can and will occur on occasion, the longitudinal values of real assets accrue at a somewhat predictable rate. The same holds true in regard to properties, infrastructure and even industrial machinery.
There are several reasons behind this relative sense of stability. Variables such as emerging technology, scarcity and demand will come into play. Real assets investment management services will therefore seek to place their clients in a position to leverage these long-term rates of appreciation.
Portfolio diversification
Real assets will normally comprise a significant portion of a balanced portfolio. In some ways, this approach is akin to how the keel of a boat provides stability on the high seas. Real assets have a historically low correlation to the movements of stocks and bonds, so they can be utilised to mitigate short-term risks. As the values of these assets will often move in cycles that are relatively independent of broader fiscal markets, they will also provide a sense of psychological comfort. This is key when making important decisions that may otherwise be unduly influenced by feelings of fear or hesitance.
Real assets: adding another string to the bow
Whether employing a real asset to invest in the long-term yield of a property or using precious metals to dampen the impacts of inflation, there are many reasons why investors flock to these opportunities.
Of course, it should still be mentioned that every investment is associated with a certain level of risk. This is why a growing number of aspiring traders are choosing to work with wealth management specialists. They can make the most out of what real assets have to offer while enjoying levels of fiscal stability that may not always be possible with other ventures.
