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Real Assets refer to land, buildings, gold, homes, 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 see, feel and 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
For context, it's clear that in the 21st Century, software applications delivered over the web, and particularly those with mobile apps, have been able to efficiently deliver value with less reliance on Real Assets.
As an example, Amazon has disrupted many industries by wringing inefficiencies out of the product purchase process. Additionally, their AWS Cloud service offers companies the ability to subscribe to a service instead of build a data center. This is an example of outsourcing Real Assets.
At the same time, real assets are everywhere and someone needs to produce them. Access to raw materials, supply chain and production capabilities are intricate innerworkings of the capability to produce Real Assets.
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 | |||
|---|---|---|---|---|
| Item | Value | % | Value | % |
| Real Assets | ||||
| Art, Furnishings and Clothing | 10,000 | 10% | 1,000,000 | 10% |
| Car(s) | 10,000 | 10% | 100,000 | 1% |
| Career | 60,000 | 60% | 3,000,000 | 30% |
| House | 0 | 0% | 1,000,000 | 10% |
| Financial Assets | ||||
| Bank Accounts | 10,000 | 10% | 900,000 | 9% |
| Mutual Funds | 5,000 | 5% | 2,000,000 | 20% |
| Stocks | 5,000 | 5% | 2,000,000 | 20% |
| Total Assets | 100,000 | 100% | 10,000,000 | 100% |
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 | |||
|---|---|---|---|---|
| Item | Value | % | Value | % |
| Liabilities | ||||
| Credit Card | 10,000 | 20% | 0 | 0% |
| Student Loans | 40,000 | 80% | 0 | 0% |
| Mortgage | 0 | 0% | 500,000 | 100% |
| Total Liabilities | 50,000 | 100% | 500,000 | 100% |
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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Videos can also be accessed from our YouTube Channel.
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True. It may produce a long-term career benefit (doubtful).
Real Asset. You own land. Income producing land.
Still unclear on Real Assets? Try out the course Quant 101.
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