Real Asset
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets, such as stocks and bonds.
Definition: Physical assets, also known as tangible assets, are physical items that have intrinsic value due to their substance and properties. These assets include precious metals (such as gold and silver), commodities (such as oil and agricultural products), real estate, land, equipment, and natural resources. Due to their relatively low correlation with financial assets like stocks and bonds, physical assets are often included in diversified investment portfolios to reduce overall investment risk.
Origin: The concept of physical assets dates back to ancient times when people stored and transferred wealth through holding land, precious metals, and other tangible items. Over time, the types and forms of physical assets have expanded, especially during the Industrial Revolution and the development of modern economic systems, where equipment and natural resources became recognized as valuable investments.
Categories and Characteristics: Physical assets can be categorized as follows:
- Precious Metals: Such as gold and silver, known for their value retention and hedging functions, especially favored during economic uncertainties.
- Commodities: Including energy (like oil), agricultural products (like wheat), and industrial metals (like copper), whose prices are significantly influenced by supply and demand dynamics and market fluctuations.
- Real Estate: Encompassing residential, commercial, and industrial properties, known for their long-term appreciation potential and rental income.
- Land: As a finite resource, land holds long-term value retention and appreciation potential.
- Equipment: Including industrial equipment and machinery, typically used in production and manufacturing, with depreciation and maintenance costs.
- Natural Resources: Such as forests, minerals, and water resources, valued for their development and utilization potential.
Case Studies:
- Case One: During the 2008 financial crisis, many investors shifted their funds to precious metals like gold to avoid the severe volatility in the stock market. Gold prices surged during the crisis, demonstrating its hedging function.
- Case Two: An investor purchased a piece of land on the outskirts of a city in 2000. With urban expansion and infrastructure development, the land's value multiplied over 20 years, becoming a significant appreciating part of the investor's portfolio.
Common Questions:
- Question One: How liquid are physical assets?
Answer: Physical assets generally have lower liquidity and slower conversion to cash, which investors need to consider. - Question Two: Can physical assets depreciate?
Answer: Physical assets can depreciate due to market supply and demand changes, natural disasters, or other factors, requiring risk assessment by investors.
