Real Assets Vs Financial Assets, where should one invest. Risk and Return Comparison

Real assets determine the wealth of an individual, whereas financial asset merely represent claims on real assets.  Nevertheless, financial assets and markets in which they are traded play several crucial roles in facilitating savings and investments for individual and institutional investors.  

  1. Real Assets:

Tangible assets with intrinsic value.

Examples:

  • Real Estate (property, land).
  • Commodities (gold, oil, agricultural products).
  • Natural Resources (timber, water, minerals).
  • Art and Collectibles.

Advantages of Investing in Real Assets.

  • Physical control and ownership.
  • Potential for long-term appreciation in value for example Land.
  • Can provide rental income or dividends.
  • Tangible assets can be used as collateral.

Disadvantages of investing in Real Assets

  • Illiquid (difficult to quickly sell).
  • High maintenance and management costs.
  • Subject to physical damage or degradation.
  • Market fluctuations can impact value.
  • Financial Assets:

Intangible assets representing ownership or debt.

Examples:

  • Stocks (equities).
  • Bonds (fixed-income securities).
  • Collective Investment Schemes (Unit Trusts).

Advantages of Investing in Financial Assets.

  • Highly liquid (easily bought and sold).
  • Low maintenance and management costs.
  • Potential for high returns through dividends or interest.
  • Diversification opportunities.

Disadvantages of investing in Real Assets

  • No physical control or ownership.
  • Subject to market volatility and risk.
  • Can be affected by company performance or economic conditions.
  • May require expertise to manage effectively.

Risk and Return Comparison:

Real Assets:

  • Generally considered lower-risk, but with lower potential returns.
  • Returns may be more stable, but also more predictable.
  • Risk: physical damage, market fluctuations, illiquidity.

Financial Assets:

  • Generally considered higher-risk, but with higher potential returns.
  • Returns can be more volatile, but also more opportunistic.
  • Risk: market volatility, company performance, economic conditions.

It’s essential to assess individual assets and consider your investment goals, risk tolerance, and time horizon before making investment decisions.