In the world of investing, diversification reigns supreme. While traditional portfolios have long relied on stocks and bonds, the inclusion of real assets offers a compelling layer of security and potential growth. Real assets, such as real estate, commodities, and infrastructure don’t just enhance returns, but serve as a bulwark against market volatility. This post explores the critical role these tangible assets play in a diversified investment portfolio.
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What Are Real Assets?
Real assets are physical or tangible assets that have intrinsic value due to their substance and properties. Unlike financial assets, which derive value from a contractual claim, real assets are grounded in their material existence. Here are a few examples.
Real Estate
Real estate is a very real asset––pun intended. Unlike financial assets such as stocks and bonds, real estate is tangible and can be directly used for residential, commercial, or industrial purposes. Its value is influenced by factors such as location and market demand.
It provides income through rental yields and potential capital appreciation over time, making it a popular choice for investors seeking diversification.
Commodities
Commodities, which include natural resources like oil and gold, are highly valued by various industries. This value is driven by supply and demand dynamics, geopolitical factors, and economic conditions. Commodities offer a nice hedge against inflation and currency fluctuations because their prices tend to move independently of financial markets.
Infrastructure
When people think of assets, they may not think of public infrastructure like roads and bridges, but it is actually considered a real asset since it involves physical structures and facilities. Infrastructure investments typically offer stable, predictable cash flows, as well as potential inflation protection due to regulated returns or contractual agreements.
They are less correlated with traditional financial markets and are thus a great option for portfolio diversification. Also, because infrastructure is essential by nature, it comes with lower risk and steady demand.
Why You Should Include Real Assets in Your Portfolio
So why should you bother with real assets when you could spend a lifetime experimenting with financial assets? Real assets offer several unique benefits, making them a must-have for anyone seeking to build a truly diversified portfolio.
Protection Against Inflation
Real assets provide a natural hedge against inflation, which can severely impact your investments. Their intrinsic value usually rises with increasing prices, as they are directly tied to physical goods and services that become more expensive during inflationary periods.
For example, real estate properties can increase in value and generate higher rental income when inflation drives up housing costs. Similarly, commodities often see prices rise when inflation erodes the purchasing power of currency.
Diversification
The importance of having a balanced, diversified portfolio cannot be overstated. While there are many ways to achieve this, one of the best strategies is to include real asset investments. They help to spread risk and reduce volatility during market downturns. To maximize these benefits and receive long-term returns, consider investing in various asset classes.
Tangible Value
Real assets offer tangible value due to their physical presence and utility. This intrinsic worth provides a sense of security to investors. Consider an investor who owns farmland—they don’t just get the benefit of reaping investment returns but also have the ability to produce agricultural products and grow their wealth in that way.
This kind of tangible value assures investors that their investments are backed by real, usable assets. Financial instruments, whose value is often abstract and subject to the whims of the market, do not offer this guarantee.
Capital Appreciation
Capital appreciation is related to inflation in that, as the demand for real assets grows, so does their value. Appreciation can result from factors like urbanization and technological advancements and continually offers new opportunities for growth.
Tips for Getting Started With Real Assets
So you’ve decided to take the leap and include some real assets in your portfolio, but where do you start? Here are some tips on what to look for when considering real assets and how to leverage them effectively early on:
- Define Your Investment Goals: First, you need to understand your financial objectives. Are you seeking income generation? Capital appreciation? Something else? Identifying these goals is key to choosing the right asset(s).
- Research the Market: Be sure to conduct thorough research on the specific real asset market you are targeting. Each category (such as real estate, commodities, or infrastructure) has unique risks and opportunities. It’s important to be informed about these so you can make smart financial decisions.
- Start Small and Diversify: Consider starting with a small investment to gain experience and reduce risk. As you become more comfortable with real assets, you can gradually increase your exposure.
And don’t be afraid to seek professional guidance. Alpha Wealth Funds’ financial planners follow a six-step process to help you set and achieve your financial goals. No matter the type of real asset(s) you’re interested in, you can benefit from getting expert advice.
Join the World of Real Assets Today
Many investors overlook real assets when building their portfolios, but this can be a huge mistake. Real assets offer unique benefits and contribute to a well-rounded investment strategy. Education is key, and by understanding the different types of real assets and what they offer investors, you can create a solid portfolio that achieves lasting impact.
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.