An introduction to real assets
If you're looking to grow your wealth and secure your financial future, investing could be a wise decision. While many people are familiar with certain financial assets like stocks, bonds, and mutual funds, there's another category of investments that often is overlooked but can offer significant benefits: real assets. In this article, we'll explore what real assets are, why they are worth considering, and how they can potentially benefit your bottom line. Let’s dive in!
What are real assets?
Real assets are physical or tangible assets that have material value and can generate income or appreciate over time. Unlike financial assets, which represent ownership or claims on financial instruments or contracts, real assets have a physical form and often have direct utility or use. Real assets can include a wide range of investment opportunities, such as real estate, natural resources, infrastructure, and collectibles.
Let’s take a closer look at some different investment opportunities that represent real assets:
Real estate
One of the most well-known and popular forms of real assets is real estate. Owning real estate can provide numerous benefits, including rental income, potential appreciation, and diversification. Real estate investments can take various forms, such as residential properties, commercial buildings, or even vacant land. Rental properties, for instance, can generate consistent cash flow, while properties located in growing areas may appreciate over time.
Resource equities
Investing in natural resources is another way to benefit from real assets. Natural resources include oil, gas, minerals, timber, water, and electricity. As the global population grows and industrialization continues, demand for these resources increases, making them potentially lucrative investment opportunities. Investing in natural resources can be done directly through ownership of resource-rich land or indirectly through stocks of companies engaged in resource extraction and production.
Infrastructure
Infrastructure assets, such as toll roads, bridges, ports, airports, and utilities, provide essential services to society. Investing in infrastructure can offer stable cash flows and potential long-term growth. Many infrastructure investments are financed through public-private partnerships, providing opportunities for private investors to benefit from steady income streams.
Additionally, infrastructure investments can counteract inflation as the revenue generated often keeps pace with rising prices.
What’s the difference between real assets and financial assets?
The main difference between real assets and financial assets lies in their nature. Real assets are physical or tangible assets that have intrinsic value as mentioned before. These assets exist in the physical world and can generate income or appreciate over time.
On the other hand, financial assets represent ownership or claims on financial instruments or contracts, like stocks, bonds, and mutual funds. Financial assets are more abstract and represent the potential for future cash flows or returns.
While both real assets and financial assets can be part of an investment portfolio, real assets offer the advantage of tangible value and often provide diversification, inflation protection, and potential income generation, while financial assets offer liquidity and the potential for capital appreciation based on market performance.
Should you consider real asset investments?
Now that we've explored various types of real assets, let's discuss why they’re worth considering for your investment portfolio:
Enhanced diversification
Real assets have unique economic sensitivities to traditional stock and bond investments. When added to traditional investments, real asset investments can help reduce volatility and enhance diversification benefits in a portfolio. By giving you more paths to get to your destination, investing in real assets can help support your long-term goals
Managing inflation
Real asset investments are relatively sensitive to inflation. Inflation often positively affects their prices and revenues, so they can perform well in periods of both rising and unexpected inflation, which are usually damaging to traditional stock and bond returns. It’s why investing in real assets gives an opportunity for you to weather inflation’s storm while growing your investments alongside it.
Attractive total returns
Investing in real assets is a great option to help you navigate market ups and downs. Asset classes across the real asset spectrum can offer strengths in different parts of the market cycle that real assets have. They’ve historically delivered attractive total returns over full market cycles, which may improve risk-adjusted portfolio returns without sacrificing long-term growth potential in your investment portfolio.
Tangible value
Unlike financial assets, real assets have tangible value. They represent ownership of physical assets that have intrinsic worth, which can help provide a sense of security and stability, especially during times of market volatility.
Potential for appreciation
Real assets, like real estate, can appreciate over time. By carefully selecting assets in growing or high-demand areas, investors can potentially benefit from capital appreciation in addition to any income generated. Real assets offer an alternative investment opportunity to financial assets that can enhance your investment portfolio.
By diversifying into real estate, commodities, natural resources, infrastructure, or collectibles, you can potentially benefit from income generation, protection against inflation, and the potential for appreciation.
It’s always beneficial to speak with an advisor so that you understand the considerations and risks when it comes to different investment strategies.