Real assets refer to physical, tangible assets that have inherent value due to their substance and properties. In investing, real assets include real estate, commodities, precious metals, art, antiques, and collectibles. Investors are increasingly allocating portions of their portfolios to real assets due to their potential to generate income, appreciate in value, and provide diversification. This article will provide an overview of the main categories of real assets, their investment characteristics, risks and returns, and reasons why investors allocate funds to real assets as part of a balanced portfolio.
Real estate is the most common real asset investment
Real estate in the form of residential, commercial, industrial, farmland or other property is a major real asset class. Real estate can generate rental income for investors, and the property itself can appreciate in value over time. However, real estate investing also carries risks like fluctuating property values, expenses for taxes, maintenance and periods of vacancy without renters. Overall, real estate is attractive to investors seeking moderate growth from rents and property value increases, as well as portfolio diversification.
Commodities provide exposure to physical goods and raw materials
Commodities refer to physical goods and raw materials, including agricultural products, metals, energy products like crude oil and natural gas, among others. Commodities can be invested in directly or through funds and futures contracts that track commodity prices. Investing in commodities provides exposure to essential economic inputs and acts as an inflation hedge. However, commodities tend to be highly volatile in price.
Precious metals hold intrinsic value and scarcity
Precious metals like gold, silver, platinum and palladium are real asset investments valued for their scarcity, intrinsic properties as stores of value, and use as inflation hedges. Precious metals can be invested in physically in the form of bullion and coins, or through funds, ETFs, and derivatives. While precious metals have held value over time, their prices still demonstrate volatility.
Other alternative real assets
Some additional alternative real asset categories include art, antiques, wine, collectibles, and gemstones. These tangible, physical asset classes can generate returns through price appreciation as they gain value over long time periods. However, they tend to be highly illiquid compared to financial securities, require authentication and care for preservation, can have high carrying costs, and have opaque pricing.
Real assets provide portfolio diversification
A key reason investors allocate a share of their portfolios to real assets is because of their low historical correlation to traditional financial asset classes like stocks and bonds. Adding real assets can improve portfolio diversification and risk-adjusted returns. Investors may allocate anywhere from 5-20% of their total portfolio to real assets, depending on their risk tolerance, growth objectives and desire for diversification.
Real assets like real estate, commodities, precious metals and other tangible categories are increasingly being used by investors seeking moderate growth, steady cash flows, inflation hedges and improved portfolio diversification. However, real assets carry their own unique risks, so proper due diligence is required.