Real Assets refer to land, buildings, computer systems and code, inventories, equipment, patents and the human knowledge used to create products and services. It is Real Assets and their income-producing nature that Financial Assets (stocks, bonds) derive their value from.
Real Assets may be things you can touch that have an easily-determined market value. Their value may also be difficult to quantify, like intangible assets and customer goodwill for companies. These are often accounted for in the long-term assets section of a company's balance sheet. The intellectual capital of organizations and individuals are also considered Real Assets.
Synonym: real investments
Real Assets are often introduced and discussed along with Financial Assets. The following points make the distinction between the two clear.
In the examples below we review a personal balance sheet for two individuals, Ms. Early and Mr. Late. Their stage in life (early and late) and risk tolerance often determines the components, value and weight (allocation) of their personal assets and liabilities.
|Ms. Early||Mr. Late|
|Art, Furnishings and Clothing||10,000||10%||1,000,000||10%|
Note how Real Assets tend to be longer-term and income-producing in nature. Also note how over time the ratio of Real Assets to Financial Assets often changes, as does the liquidity of those assets.
It is also important to consider the Liability side of the Personal Balance Sheet. Often loans are made towards Real Assets rather than Financial Assets. An example of a liability associated with a Financial Asset is the margin balance on a brokerage account.
|Ms. Early||Mr. Late|
Again, note that liabilities that appear higher in the table represent shorter-term obligations. This is important to consider not only for personal balance sheets but for corporate balance sheets as well.
Doc: Can you think of an individual whose extreme
allocation to Real Assets
demonstrates his underconfidence in the financial system?
Lia: An off-the-grid survivalist?
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True. It may produce a long-term career benefit.
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