Written by Jordan Pasternak
Investing in real assets can be a great way to protect capital in volatile market conditions. Real assets are physical or tangible assets that have value, such as real estate, oil, precious metals commodities, and agriculture land. Luxury and collectable goods also fall within this category, including wine, art, jewelry, rare coins, and baseball cards. Financial assets like stocks and bonds derive value based on a contractual claim on an underlying asset. For instance, if you buy an Apple stock, you have contractual ownership as an equity position in the company and are entitled to dividends and the liquidity inherent in the public markets to buy and sell the position. Real assets, on the other hand, generally have a value independent from valuations derived from the value of money. As such, investing in real assets can be a strategy to hedge against inflation. These assets are shown to have low correlation to stocks and bonds, providing a great way for portfolio diversification. It should be said that assets within the real asset categorization like natural gas, real estate, and minerals, perform differently in market conditions with different correlation behavior to stocks and bonds.
Reasons Why Investors Invest in Real Assets
The growing world population, globalization, increased ease of world-trade, and boost in commerce due to technology are other reasons that many investors are finding real assets particularly attractive. For example, as China and India emerge as powerhouses in infrastructure growth, these asset classes will appreciate in value as demand increases. Renewable energy investments are also proliferating as technological breakthroughs emerge. For instance, the North American hydraulic fracking boom has created some real opportunities to profitably invest in natural gas trends. The trend towards urban living where more and more people live in industrialized locations will necessitate growth in infrastructure and real estate development. Risks are also abundant in real assets, particularly real estate. Investors are dealing with potentially very illiquid investments that they may not be able to sell at a desirable price within a reasonable time frame. Currency fluctuations and tax regulations can also affect real estate prices. Additionally, investors should not forget the results of the sub-prime crises, where people took mortgages out on the assumption that property values would continue to rise at a record pace. When the bubble burst, individuals were left owing more money on the real estate asset than it was worth at the time.
What Investors Should Know About Real Assets
One of the most popular real asset investments in history has been gold. Gold has a special role among real assets in that the United States once adhered to the gold standard, backing paper money by gold stored in central banks. Gold is still seen as a safe haven in times of economic uncertainty. In volatile times, demand for this precious metal soars as individuals buy gold to hedge against falling currency, and gold prices will increase. Assets that are seen as capital preservation tools, like gold and sometimes real estate, perform well in times of uncertainty.
Investors pursuing real asset investments should be relatively experienced as to how the asset class behaves and time-horizon requirements. Illiquid assets generally have a long investment life, sometimes 15 years or more. Lack of liquidity also contributes to the long life of the investment, in that interest in the investment can be locked up for a specific amount of time depending on contractual obligations, or very difficult to sell quickly at a favorable price.
The Different Ways to Invest in Real Assets
There are different ways to invest in real assets. Investors can purchase real assets directly like buying a gold bar, a real estate investment, or a direct investment into a farm. Another possibility is to invest into a closed or open-ended fund, REIT’s, project finance opportunity, or stocks operating in real asset sectors. An individual can invest in a fund that specializes in investing in real assets. Similar to a private equity or venture capital fund, these funds will pool an investor’s capital and use their expertise to purchase and ideally profit off of real asset investments. The capital will then be returned in a similar structure to private equity after fees to investors.
Real assets remain an alternative investment class to diversify a traditional portfolio and hedge against inflation risk and market volatility. There is a diverse range of options for investors to allocate to real assets and take advantage of potentially lucrative market trends.
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