What Is a Hard Asset & Should You Have It in Your Portfolio?
Should You Have Hard Assets In Your Portfolio This 2023?
Financial advice 101 tells us to diversify our portfolios. Investing in hard assets is one of the best ways to do so. These assets have intrinsic value in any market economy—good or bad.
Companies and investors use hard assets to hedge against inflation, generate consistent long-term returns, and protect against depreciation.
If you want to diversify your portfolio, hard assets may be what you’re looking for. But what exactly defines a hard asset?
What is a Hard Asset?
Hard assets are tangible. Real estate assets are prime examples. You can see them, they’re long-term, and they can keep up with rising inflation.
There are two types of hard assets that we need to consider:
- Fixed Assets - These are long-term hard assets. They support the production of goods and services. Examples are machinery, properties, and more.
- Current Assets - These are assets used to produce products and services. Examples of this are raw materials. Typically lasts less than a year.
Let’s use Apple as an example. When Apple makes its phones, they’re using raw materials such as aluminum, iron, lithium, gold, and copper (current assets).
Apple also invested in custom-engineered equipment, machinery, and robots to help assemble the phones (fixed assets).
Now that we know the basics, here are some examples of hard investments you can invest in.
Examples of Hard Assets
Both fixed and hard assets have one thing in common—intrinsic value. Despite the ebbs and flows of the market, you can rely on hard assets to stabilize a percentage of your portfolio.
The most popular examples of hard assets include the following:
- Real estate properties such as land or commercial buildings.
- Precious metals such as gold and silver.
- Resources such as oil or natural gas.
- Industry-grade machinery such as those in production lines
- Vintage cars that appreciate value over time.
- Paintings
- Collectible items such as vintage coins, trading cards, or signed merchandise.
Hard Assets vs Intangible/Soft Assets
Soft assets are investments that we can’t physically touch or see. But despite this, they also offer value just like hard assets do. Common examples are:
- Branding
- Trademarks
- Patents
- Stocks
- Bonds
- Software
Stocks and bonds are both excellent investment vehicles. They can also be extremely liquid and can be sold quickly. However, the value can drop just as fast due to high liquidity.
Hard assets are the opposite. A shaky market economy still affects hard assets but not as much as soft assets. That’s because it offers the following advantages:
Pros of Hard Assets
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Hard assets are great investments for diversifying your portfolio because they can help you:
Hedge Against Inflation
Inflation jacks up the prices for most, if not all of our wants and needs. But let’s say you have a real estate property that you rent out to tenants.
The rising prices during inflation also mean that operating costs are higher. One way to keep your businesses afloat is by gradually increasing rent.
Another example we can look into is gold since it has a history with real estate during the market crash of 2008. Between 2008 and 2011, gold prices rose by 32.8%.
Tax Benefits When Investing in Real Estate
Tax laws are different depending on your location. But in general, investing in real estate offers a lot of benefits such as:
- Depreciation: You can depreciate the value of the property over a period of time, which can reduce your taxable income.
- Mortgage Interest Deduction: You can deduct the interest paid on a mortgage for a rental property from your taxable income.
- Property Tax Deduction: You can deduct the property taxes paid on a rental property from your taxable income.
Platforms like Doorvest offer real estate investment opportunities at affordable rates. It’s a great way to invest in property without shelling out a large chunk of capital.
Less Volatile Than Soft Assets
Soft assets like stocks and bonds are speculative which can make them volatile. On the other hand, the value of hard assets such as real estate is based on a number of different factors.
This includes the location of the property, its size, or its condition. All of these are more predictable and stable than the swings of the stock market.
Wide Range of Uses
You can use hard assets for a number of different things. For example,raw materials are used to create products while machinery and equipment support or facilitates these processes.
Diversifies Your Portfolio
Hard assets tend to have a low correlation with other asset classes, such as stocks and bonds. When the prices of stocks and bonds drop, the prices of hard assets may not be affected. In some cases, they can even go up, especially during inflation.
Cons of Hard Assets
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There isn’t an investment without its fair share of setbacks. To help you decide if hard assets are for you, here’s a list of cons that you should consider:
High Capital Requirements
Hard assets need a large capital. Investors often apply for loans to fund initial purchases of assets such as real estate. Unfortunately, not everybody can afford to do so.
A great alternative is investing in fractional real estate. You get to be a genuine owner of your part of the property.
Lower Liquidity Options Compared to Soft Assets
Assets such as real estate or heavy machinery used in the production of goods and services are hard to sell. On top of that, the transaction costs can also set you back a pretty penny.
More Management & Maintenance Involved
Owning a rental property requires you to handle repairs, maintenance, and other expenses. Commodities, such as gold or silver, do not require any physical maintenance. But they may require additional costs for storage and insurance.
Can Yield Less Long-term Returns Compared to Soft Assets
Real estate and commodities have lower long-term returns than stocks. Stocks may have returned 1000% over 10 years, but physical assets may not have grown as much.
Key Takeaways
Investors need a good mix of hard and soft assets to ensure growth and stability in both the short and long term. But hard assets can help investors during times of sudden market shifts.
As a recap, here are some important details regarding hard assets:
- Hard assets can help you hedge against inflation, gain tax benefits, and diversify your portfolio.
- It has intrinsic value throughout the ebbs and flows of the market.
- It has a wide range of uses.
- Hard assets are less volatile than soft assets
If you want an opportunity to invest in premier real estate at an affordable rate, look no further than Doorvest! Sign up today and be part of the next generation of investors!