Real Assets
The Basics of Real Assets
Why Use Them
The recent Inflation blog identified real assets as an investment strategy for a time of higher inflation. If the probability of a financial winter proves out over the next 5-10 years, then our investments should be in assets that a) are relatively inflation-protected and b) are real, tangible things whose value may still drop, but less than the stock market.
What They Are & Aren’t
Real or hard assets are physical assets that have intrinsic value due to their substance and properties. (1) Real assets include precious metals, commodities, real estate, land, and natural resources. By extension, businesses that produce or support the production of real assets have many of the same benefits as do the real assets themselves. Think of mining companies, investment trusts for real estate, etc. For the typical investor, your home is the main real asset you have.
What aren’t real assets? Banks and all financial institutions, cash, savings accounts, bonds, GICs, technology stocks, consumer discretionary stocks, services stocks, etc.
Other than your house, do you have Real Assets in your portfolio? The easiest way to find out is to ask your financial advisor. Or, take a little time and review your stock/fund/etf holdings yourself to see if you can find some. The same research can be done for your pension fund.
Pros & Cons
There are no bad times to own real assets. Why do most people tend to have little or no exposure to them? Because in good times their value provides positive returns, just less returns than higher profile ‘growth’ stocks like tech, and consumer goods. Real assets also tend to be best suited to longer term ‘value’ investments held for 5, 10 or even 20 years, whereas growth stocks are better suited to active trading. In other words, growth holdings tend to be ‘get rich quick’ oriented whereas real asset ‘value’ holdings tend to be suited to ‘slow and steady wins the race’.
And remember, like any other investment, there are good and bad real assets.
Where to Access Them
There are a few different ways to hold real assets:
· Directly purchase a rental property, some farmland, some gold or silver coins or bullion
· Start or buy into a real asset-based business
· Dig into Alternative Investments to purchase some Real Estate Investment Trusts (REITs), farmland trusts, real asset-based business trusts
· Shift your stock market holdings into REITs, bullion trusts, commodities, commodity producers, utilities, or real asset-based funds & etfs
If Alternative Investments is a new thought for you, what they do is provide a means for investors to own a range of assets outside the stock market. This makes them less volatile and less liquid than the stock market while being relatively more liquid than direct-owned assets. If Alternative Investments interest you, you will have to first determine if you might be considered an Accredited Investor in Canada (2). Then, identify an Exempt Market Dealer who can confirm your accreditation and provide access to alternative investments. Note the Canadian banks do not offer this service.
How Much
Now we know why we want real assets, what they are, and where to access them, the next question becomes how much of my investment portfolio should be real assets?
There is a unique answer to this for each person. It really depends on your situation. What I can say is a typical mainstreamish portfolio – modified from the basic 60/40 – will often include 5% to 25% real assets, typically real estate and gold (3). At the other end of the spectrum, you will find business-minded people and/or those with the slow and steady approach holding 75% or more in real assets.
If you would like more assistance understanding real assets or investigating alternative investments, let me know.
1. Investopedia.com/terms/r/realasset
2. Amurcapital.ca/blog/accredited-investor-canada
3. Portfoliocharts.com/portfolios