Investing in real assets can help to diversify your portfolio. However, there are benefits and disadvantages to investing in this class of assets that you should know about before you invest.
What Are Real Assets?
Real assets are physical assets, as opposed to financial assets. Examples of real assets are real estate, land, mining rights, gold, precious metals, copyrights and patents.
Pros of Investing in Real Assets
Institutional investors have increasingly been investing in real assets. Steven Rosenblum Boulder, an investment advisor specializing in real assets, recommends this class of assets as a good investment for his clients. Here are some of the benefits of investing in real assets.
Diversifying Your Portfolio
Real assets are a good way to diversify a portfolio that is heavily invested in stocks and bonds. Since real assets are physical assets, they will perform differently than stocks or bonds, which are financial assets. This protects you from ups and downs in the financial markets. Chances are, when stocks are going down, your real assets will hold their value or even increase in value.
Owning Scarce Assets
Most real assets have scarcity built in. The supply of real estate and land is finite. So is the supply of precious metals. As the population of the world increases, there is more demand for real assets, but the supply is not increasing. This means the value of these assets will rise. Often, they will outperform stocks and bonds.
Having a Stable Income
Owning real assets will give you a good cash flow. This income is often tax-advantaged, as is the case with real estate. Because of the stable income yields of real assets, they are a great investment for retirees who depend on the income to fund their retirement.
Hedging Against Inflation
Real assets often increase in value just prior to a rise in consumer prices. Some real assets are used in manufacturing consumer goods and others increase in price along with inflation. So, owning real assets will protect you from the erosion of your money’s value due to inflation.
Cons of Investing in Real Assets
Although there are many benefits to investing in real assets, there are also some risks that you should be aware of.
Exposure to Political Risks
When you invest in commodities or infrastructure, you are exposed to political risks, especially if you invest internationally, although it can happen domestically as well. During political turmoil and wartime, countries may nationalize certain critical industries, and this could cause you to lose your entire investment. In addition, real assets connected to mining or energy production could be subject to environmental pressures which could make your investments unprofitable.
Effects of Economic Downturns
When the economy goes down, some real assets could decrease in value as well. However, some real assets, such as farmland, can go up in value during a tough economy. You really need to look at each type of real asset separately and analyze its exposure to economic downturns.
Despite the potential risks, real assets offer so many benefits to investors that they are usually worth the risks involved. Of course, you should not invest exclusively in any one asset class. But as part of a diversified portfolio, real assets can be very profitable investments compared with digital assets. Do an asset assessment to determine if you should put more money into real assets or virtual assets.