Building Wealth through Real Assets
Most people do not pay attention to or even understand most financial or economic terms. As a matter of fact, the average person does not talk a lot about financial matters at all. So, when terms such as real assets come up – they are usually clueless as to what this financial phrase actually means. The description below will provide a real assets definition for this particular financial expression.
What is a real asset?
A real asset is a physical asset that has value. This value is based off of their particular substance and properties. This term is often used for businesses and in the world of investing. The physical properties of a real asset for a business could include a fleet of cars, state-of-the-art manufacturing machinery or a company’s real property.
Real assets within the investment world includes items such as gold, oil, real property and crops. All of these items are physical and their particular properties and substances have value. Certain items such as a company’s brand name or specific types of stocks typically cannot be classified as real assets because they are not tangible.
Other financial vehicles such as futures, exchange-traded funds (ETFs) and real estate investment trusts (REITs) are not real assets because their value is based off of the underlying real assets that gives them their value. Keep in mind that real assets can include financial investments but financial investments typically cannot be classified as a real asset.
Why are real assets important?
Do not forget that real assets are not financial holdings. They do not get their value from a claim on other assets. Instead, this particular class of assets are valued from their own natural qualities and properties. Many real assets require a space for storage and personnel for maintenance. These aspects of real assets affect their overall value in terms of buying and selling.
How can real assets improve a person’s financial holdings and/or investments?
Real assets are commonly used to hedge a portfolio. People can also include them within their diversified portfolios. They have a low relation with financial assets such as stocks and bonds. Investors who are very concerned about inflation typically rely on real assets.
They are also a lot more stable than fluctuating currency prices and they have a tendency to offset other macroeconomic factors. Real assets typically outperform financial based assets (stocks, bonds, est.). Real assets are a better form of investments in terms of stability.
Disadvantages of Real Assets
Real assets have disadvantages as well as perks. First of all, this type of investment is harder to liquidate than financial assets. They take a lot longer to sell and typically have higher transaction fees. Once again people who own real assets must cover storage, maintenance and carrying costs that are associated with having these items.
How are businesses evaluated in terms of real assets?
A business is typically evaluated in terms of its financial and real assets. It is also evaluated in terms of its ability to generate cash flow. In terms of a business, real assets tend to lose their value over time. They are not like financial assets that typically generate growth and increase value. If a business owns its property, this is a good attribute for that organization. Real estate tends to increase in value over time and real property adds value to a business’s portfolio.
Real Property as a Real Asset
Physical real estate is a real asset that provides protection against inflation. It is also
beneficial for providing an owner (or investors) with consistent cash flow through the process of rent or collecting mortgages.
Property does require a substantial amount of upfront payments and it is hard for smaller investors to diversify within this field since property is expensive. Real property can also be difficult to manage and time consuming. The other drawback to this type of real asset is that it is harder to get rid of once a person owns it.
Gold is one of the most valuable real assets in the world. This precious metal is just as important as real property in terms of appreciation and it retains its value for many years. Gold does not necessarily lose its value though the stocks that are issued for gold can go into decline.
The thing about gold that makes it such a good real asset is that it will always be in demand and there is a limited quantity of gold in the world. So these factors help to keep the value of gold intact. Gold is not a liquid investment and if a person is trying to get rid of it quickly they will have hard time doing so – even though it is in demand.
Also, gold does not generate cash flow like real property. Gold is a real asset that is best suited as a safety net for finances and as a long term investment. When a person is ready to sell their gold (not just shares that represent the gold) it will usually provide a good return on their investment.
Oil is a truly one of the best real assets in the world. This fuel source is critical to any modern society. Many products and services are generated from oil. It is also necessary for transportation and for powering the modern world’s economy.
Many people will not be able to own a physical oil plant or land where oil is produced. However, they can own real assets related to vehicles and equipment.
Investors can also generate cash flow over the long run with tangible items associated with oil procurement. While there are maintenance and storage costs associated with these investments; they are excellent investment choices for investors who can afford to take them on. Other types of real asset investments include machinery, commodities, agricultural land and various precious metals.
Real Asset Management Firms
A real asset management firm can help investors to figure out the best type of real asset investments that is best suited for them and their situation. Ssga Real Asset Fund is one type of organization that specializes in real asset investments. This organization and many more that are like them can help any person with their investment needs.