Why Should You Invest in Physical Assets?

Investment 101

Published: April 27, 2022

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One of the first pieces of advice that you will hear when getting into the investment world is that you should diversify your investments. Acquisition of physical assets is a great way to start diversifying. 

A physical asset (also known as a tangible asset or real asset) is any sort of valuable material that has a physical form and inherent physical worth. Both of these qualities make physical assets a great investment, as a physical asset’s value is somewhat insulated from instability in the financial sector.

Differences Between Physical Assets and Financial Assets

On the other hand, a financial asset does not have a tangible form and is instead based on an agreement on its value within the financial system in which it exists in. 

Most people recognize financial assets in the form of stocks and cash. Stocks are completely intangible, and while cash is represented in a physical form, that physical form doesn’t have intrinsic value. Rather, it is simply a representation of the asset’s agreed value. 

Meanwhile, land or precious metals like gold are examples of tangible assets, as they physically exist and would maintain some level of value regardless of the financial system that they are traded within. 

Types of Physical Assets

There are many different types of physical assets. However, some of the most common categories include precious metals, real estate, collectibles, and livestock. It is important to note that while these assets hold intrinsic value, that value can vary based on factors like the quality of the asset and fluctuations within the market or the industry of the physical asset. 

Precious Metals

Since precious metals, such as gold, are resistant to inflation and general dips in the market, people typically seek out this physical asset more than others. They’re also highly valuable and can take a variety of forms, including: 

  • Gold;
  • Silver;
  • Platinum;
  • Rhodium;
  • Ruthenium;
  • Iridium;
  • Rhenium;
  • Indium;
  • Californium 252;
  • Palladium;
  • Osmium;
  • Scandium.

There are also less valuable metals out there, also known as “semi-precious” metals such as copper, iron, and nickel.

Real Estate

Real estate is property consisting of a plot of land along with any tangible assets (such as buildings) that are fixed within its boundaries. Examples of real estate assets include:

  • Residential real estate: This is any property that is zoned for dwelling purposes, such as apartments or single-family homes.
  • Commercial real estate: This is any property that is zoned for business purposes, such as office buildings or restaurants.
  • Industrial real estate: This is any property that is zoned for industrial use, such as factories or warehouses. 
  • Raw land: This is a plot of land that is not yet developed for use. 
  • Special purpose property: This is a type of property that is designed for a very specific purpose, such as cemeteries or schools. Special purpose property is typically developed for public use. 

The value of real estate can be affected by many factors, such as location, demand, and the influences of the housing market.

Collectibles

Valuable collectibles can be any item that holds considerable value and that can hold greater relative value when it is part of a set. Often the value of collectibles comes from rarity, oddity, or historical importance. Examples of valuable collectibles include:

  • Coins — particularly gold and silver coins;
  • Antiques;
  • Jewelry;
  • Comic books;
  • Trading cards;
  • Action figures;
  • Dolls;
  • Board games;
  • Stamps;
  • Movies;
  • Albums;
  • Books;
  • Art;
  • Wines;
  • Barware;
  • Watches;
  • Clocks;
  • Instruments;
  • Music players;
  • Handbags;
  • Textiles;
  • Cars;
  • Various historical memorabilia;
  • Various limited edition materials;
  • Various misprints and product errors.

If you are collecting based on value, it is important to be aware of the typical value of the items that you are interested in and to have them professionally appraised.

Livestock

Livestock can be any group of domesticated and semi-domesticated animals that are raised in the agricultural sector for the sake of rendering food, services, and various materials. 

However, some animals are exempt from being categorized as livestock in the eyes of the law, and there may be further exceptions based on the purpose for which the animal is raised. For instance, production animals with shorter lifespans may often be considered inventory, as opposed to assets. Livestock used for breeding, draft, or dairy purposes — such as cattle, sheep, and goats can be depreciated as assets. Examples of livestock include:

  • Cows;
  • Swine;
  • Goats;
  • Sheep;
  • Poultry;
  • Live fish;
  • Elk;
  • Reindeer;
  • Bison;
  • Llamas;
  • Alpacas;
  • Horses;
  • Donkeys;
  • Mules.

It is important to note that poultry and fish may not always be considered livestock, depending on what definition or parameters you are using. However, they are valuable physical assets, regardless. 

Reasons To Invest in Physical Assets

Although physical assets can take many forms and present their own advantages and disadvantages, physical assets, in general, can diversify your investment portfolio. In addition, there are plenty of different reasons why someone may choose to invest in physical assets. 

Added Protection Against Inflation

Inflation refers to a broad increase in the cost of goods and services, resulting in a reduction in the purchasing power of money. While physical assets can (and often do) experience increases or decreases in value in correlation with financial assets, they do offer some level of protection from inflation. 

This is because physical assets hold intrinsic value and will always hold some level of value despite market fluctuations. Furthermore, in times of instability in the financial system, financial institutions may view physical assets as more reliable and stable assets compared to financial assets. For these reasons, physical assets are sometimes used in place of traditional financial assets, as in the case of gold IRAs.

Utility

Many people also turn to physical assets not out for financial reasons, but rather for the enjoyment they receive from them. For example, if you own a property, you can live or work on the property. Or, if you have invested in art, you can display it. As such, physical assets can have personal value as well as trade value. 

Easy To Sell and Transfer

Tangible assets are often easy to sell and transfer due to their tangible nature and intrinsic value. After all, it’s a lot easier to trade a coin or transfer a car title in comparison to selling different stocks and large sums of money. Physical assets are also often easy to appraise due to their relatively stable market value. Unstable markets — those that can be easily affected by the climate, media, and more — are harder to appraise due to difficulties in forecasting fluctuating market values.

How To Invest in Physical Assets

Although investing in physical assets presents plenty of benefits, you can still encounter bad investments or even make financial management mistakes now and then. To avoid this, it’s best to adhere to some of these best practices: 

  • Hold on to assets that hold long-term value;
  • Buy low and sell high on relatively volatile assets;
  • Have your assets regularly appraised;
  • Get documentation regarding the quality and value of the asset;
  • Purchase and sell assets through a reputable source;
  • Monitor the marketplace.
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