Hard Assets: The Ultimate Guide
For businesses and companies looking to build a diversified investment portfolio, minimize volatility, and generate consistent returns, experts often advise to invest in hard assets. Hard assets are investments that are tangible and have intrinsic value through good times and bad. Investments such as real estate also have a history of being lucrative investments in an investment portfolio.
In this guide, we will cover:
- What are hard assets?
- Hard assets: examples
- Hard vs. intangible/soft assets
- Long-term vs. Short-term
- Advantages of hard asset investments
- Disadvantages of hard asset investments
- Purchasing a hard asset
- What makes hard assets valuable?
- How to profit from hard assets
What are hard assets?
Hard assets are physical or tangible assets that hold value and are typically held for the long term. These assets are considered an investable asset because of their intrinsic value. Companies and individuals can purchase them for revenue growth and production.
They are oftentimes also considered fixed assets. Fixed assets are defined as assets that have a life of more than one year and typically purchased as a long-term investment. As a business investment, a fixed asset usually supports the production of a company’s goods or services. In accounting, they are classified into three categories on a company’s balance sheet: property, plant, and equipment. Some examples within these three categories include buildings, vehicles, machinery, and office furniture.
While they are usually long-term, they can also be short-term assets, referred to as current assets. These are defined as being used up to their full life expectancy within one year versus long-term assets owned for more than one year.
Hard assets come in many forms. The common denominator is that they support revenue growth and aid in the efficiency of production of the goods or services a company produces.
The following are common examples:
- Real estate such as buildings or land
- Gold, diamonds, and other precious metals or stones
- Oil, natural gas & other resources
- Machinery or equipment
- Vehicles such as classic cars
- Collectibles such as stamps
Hard vs. intangible/soft assets
Assets, among their many characteristics, come in two primary forms: hard and intangible assets. Intangible assets are non-physical assets that have value and are used over the long-term. Examples of intangible assets include the following:
- A company brand
- Investments in securities
- Company expertise
- Company reputation
- Trade secrets
Long-term vs. Short-term assets
Hard assets themselves fall into two categories: long-term and short-term assets. Short-term refers to assets used up in less than one year, and long-term assets are used longer than one year.
Because of the timeline of use, long-term assets are always fixed assets because they retain their value and usefulness over an extended period of time. Additionally, they typically support the organization’s production of services or goods. It’s important to note that most are long-term due to their potential for growth in value over time.
For example, let’s imagine a commercial real estate company is building a condominium. The company buys construction materials such as steel, sheet rock, and insulation. The new construction condominium, once completed, would be classified as a long-term asset as it directly adds value to the commercial real estate companies investment portfolio over time. Other items such as the steel, sheet rock, and insulation construction materials would be classified as short-term hard assets, because they were be consumed or used up in a shorter time frame.
Advantages of hard asset investments
As with any investment, hard assets have a host of advantages. Historically, they have outperformed equities during periods of inflation, global growth, and high-interest rates. Other advantages include the strength and longevity of the investments over time.
The following is a list of key advantages:
- They are tangible and physical, providing a welcomed contrast to investments like stocks that lack both characteristics.
- Adds diversity to traditional portfolios of stocks and fixed-income. Hard assets usually show a low correlation with traditional investments such as stocks, making them an excellent portfolio diversifier.
- Competitive returns that historically have outperformed conventional investment assets.
- Hedge against inflation. They typically hold value well during times of economic inflation.
- They do not typically lose significant value (more than 10-50%) in one day like stocks can. Decline, when present, is usually gradual.
Specifically, if your asset is real estate, your investment can provide you with a hedge against inflation. For example, imagine a manufacturing company. Materials costs suddenly rise due to inflation, causing the price of goods to rise and profit margins to lower. The company accepts that its profits will be lower until inflation normalizes. However, they own the warehouse building that houses production. This piece of real estate has the opportunity to at least keep pace with inflation gains, making it an excellent investment during inflationary periods.
Businesses and individuals alike look for recession and inflation-proof investments. While nothing is fully exempt from the powers of inflation, real estate assets generally are known for keeping up with inflation. Assets like real estate investments retain value well, even during fluctuating inflation and recessionary periods.
Disadvantages of hard asset investments
Like any investment, there are downsides as well. Consider the following disadvantages before adding them to your portfolio:
- Long-term returns can be lower than stocks in the short-term.
- They are insulated from global growth because they are typically invested in one particular country, halting it from economic growth in other countries.
- They can be difficult to sell compared to a soft asset like a stock or bond.
- Assets such as real estate are closely tied with interest rate risk. When interest rates rise, this can lower asset values.
- Lower liquidity when compared to stocks or other soft assets.
- High transaction costs to liquidate them. Consider the cost of selling a piece of real estate versus selling a stock.
- Greater management, maintenance, legal and financial responsibility than soft assets.
Purchasing a hard asset
Hard assets are often expensive. Capital investments are typically decided by a company’s executive management team, as they require significant upfront cash or capital at acquisition.
Funding for them can come from several sources, including venture capital firms, banks, corporate bonds or debt, and the issuance of new stock shares.
Because of the high upfront capital required to purchase, acquisition for many individuals can be a barrier to entry. An individual could instead consider an investment in a smaller portion or share of it such as a commercial real estate building.
For example, say there is a large warehouse building for sale in downtown Dallas, Texas. A single investor hoping to invest in commercial real estate, more often than not, will not have the capital for a down payment to buy it on their own. There are other options to gain a foothold in the commercial real estate market however. Individual investors can consider investing in a REIT. With a REIT investment, an individual investor without the capital to invest individually can still benefit from investing in commercial real estate as part of a REIT.
With a number of unique options to get started, investing is possible for any individual or company looking to invest.
What makes hard assets valuable?
Hard asset value grows as a result of the market factors (i.e., supply and demand) or from inflation. Because of the volatility of both of those factors, they can increase or decrease in value. While timing the purchase can increase the success of an investment, historically, they tend to hold their value over the long term even through ever-changing economic cycles.
How to profit from hard assets
Investors explore hard assets for a variety of reasons. They are characteristically hard, stable, and tangible assets that can diversify a portfolio and provide a strong hedge against inflation.
Implementing them into an investment portfolio can provide strong returns over time as they grow in value. While stocks may experience the volatility of the global economy, they have the potential to provide stability and lucrative returns over the long run.