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Real Assets definition

A term often overlooked in Finance because most investors focus their energies trying to predict the direction of interrelated Financial Assets.
  1. Define - Define Real Assets.
  2. Examples - Review characteristics of Real Assets with examples.
  3. Context - Use it in a sentence.
  4. Quiz - Test your knowledge.
by Paul Alan Davis, CFA, December 31, 2018
Updated: December 31, 2018
Real Assets are often introduced with Financial Assets, so be sure to review this in conjunction with that. Links are provided below.

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Real Assets

Beginner

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

Examples of Real Assets

Real Assets are often introduced and discussed along with Financial Assets. The following points make the distinction between the two clear.

  • Real Assets
    • Things that are easy to value that you can see, touch and feel
    • Things that are difficult value like customer goodwill
    • Used to produce goods, services and ultimately income
    • Long-term in nature
  • Financial Assets
    • Computer entries and certificates
    • Obligations to Real Assets
    • Value is derived from Real Assets
    • Used to keep score and allocate wealth

An Example Using Two Individuals

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.

Personal Balance Sheet Assets
Personal Assets for Two Individuals
  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.

Personal Balance Sheet Liabilities

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.

Personal Liabilities for Two Individuals
  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.

In a Sentence

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?

Video

Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from our YouTube Channel.

Video Script

If this term had a video, the script would be here.

Quiz

Click box for answer.

A social media post you make on LinkedIn is a Real Asset? | True or False?

True. It may produce a long-term career benefit.

Questions or Comments?

Still unclear on Real Assets? Try out the course Quant 101.

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