Investors investigating hard assets tend to believe in their basic function as money.
The appeal of a gold standard, and of hard assets, is stability. Hard, tangible assets in your portfolio can help hedge against inflation.
Gold is the world’s most famous example of hard assets. By some estimates, gold has been used as a form of currency for the last five millennia.
In the 1870s, European countries adopted the gold standard in order to standardize transactions in the booming world trade market, thus eliminating the need for heavy gold bullion or coins, since paper currency now had guaranteed value tied to something real.
By 1971, under Nixon’s leadership, all remnants of the system were completely abandoned. Fiat money—government-issued currency—replaced the gold standard.
Hard assets include gold, timberland, farmland, mines, and real estate. These assets generally maintain their value, even through volatile economic conditions. That means hard assets are an important inflation-fighting tool—especially as inflation becomes more of an issue.
For families who can afford to tie up money for the length of time it takes to make a sizable return on an investment—such as timber—doing so can also be a matter of good financial planning.
Consider a crop of trees that takes 18 years to grow to maturity; this might be just the right choice for college savings. That is one reason that to a certain extent, the wealthy have always been active in these asset classes — it is a good way of matching assets to liabilities.
What are hard assets?
Hard assets are physical, tangible assets that possess intrinsic value because of their practical, real-world use. They have stable, dependable cash flows and are generally held long-term. Companies and individuals invest in hard assets to increase their revenue and to increase production.
Hard Asset Examples
- Real estate (residential, commercial, and industrial)
- Precious metals (platinum, gold, silver)
- Works of art
- Office furniture
- Natural gas
Soft Asset Examples
- Investments in securities
- A company's brand
- Company expertise
- Company knowledge
- Trade secrets
- Company reputation
Their biggest appeal is that they can retain some value no matter how far their market prices may fall.
Businesses purchase hard assets to protect themselves against the loss or depreciation of other soft (intangible) assets—like goodwill, investments in securities, or trademarks and patents—because the value of hard assets moves in the opposite direction of the value of soft assets.
Not all hard assets are equal in terms of their income potential. Some are more dependable than others. But as a class, they offer high yield with relatively lower risk.
Benefits of investing in hard assets
Hard assets provide important diversification for your portfolio, and tend to perform well in a couple situations:
- During times of economic uncertainty. Gold is a perfect example of a crisis commodity and is often viewed as one of the more reliable investments. When inflation hysteria rears its head (and it always does), investors start buying up gold by the ton.
- During times of inflation. Inflation leads to higher interest rates. In turn, higher interest rates can reduce the value of financial assets, like stocks, bonds, and loans. Hard assets, at a minimum, keep up with inflation.
Hard assets tend to hold their value, especially when it comes to real estate. Even if a nation’s currency were to devalue, there is still intrinsic value in real estate. There is a limited supply, and it can be exchanged for other items of value. Over the long term, real estate is usually an excellent investment response to inflation.
The key to profiting in an inflationary environment is to hold investments that increase in value at a rate that exceeds the rate of inflation.
Risks of investing in hard assets
That’s not to say that this is a risk-free asset class.
Here’s an example. You can buy real estate investment trusts (REIT) and other REIT-like entities to get quick exposure to a diversified portfolio of hard assets. Even so:
- Retail REITs are vulnerable to industry trends like e-commerce. We can see this on lower-quality mall REITs CBL Properties (NYSE:CBL) and Washington Prime Group (WPG).
- Pipelines are subject to legal setbacks. Projects are subject to long-term delays.
- Airport revenues dip during a recession and especially during a global pandemic.
- The value of windmills decreases over time.
So, before you invest, talk to a Fiduciary Financial Advisor about how to build a selective and reasonably diversified portfolio of hard assets that fits your needs.
How to profit from hard assets
If you’ve decided to explore hard assets as part of your portfolio, we’ve compiled a list of some asset classes to look into.
Commercial real estate
You can invest in apartment communities, e-commerce warehouses, data centers, and even casinos. AvalonBay Communities (AVB) is the largest residential REIT on the market, Realty Income (:O) focuses on recession-resistant retail properties, and Public Storage (:PSA) is the undisputed market leader in self-storage.
You can buy publicly-listed airports, such as Grupo Aeroportuario del Pacifico (PAC), on equity markets.
Farmland and timberland
Institutional investors usually invest in farmland and timberland directly through forest or agricultural-focused private equity vehicles. You can invest through Limited Partnerships (LPs) and REITs like Gladstone Land (LAND) and Catchmark Timber (CTT).
You have the option of investing in companies that transport oil and gas by pipe systems. Examples include the 10%-yielding Enterprise Product Partners (EPD) and Energy Transfer (ET).
If you like the idea of investing in alternative energy, you can invest in clean energy projects through partnerships like Brookfield Renewable Partners (BEP).
A Word With Elliot
I am often asked the question about whether gold, other precious metals or real estate should go into one’s IRA. I almost always recommend “no.”
With most commodities such as metals, coins, art, and others, there is a “buy” program, but never a “sell” program. So, when these go into your IRA, you will end up accumulating non-liquid assets that must be sold to fund your retirement. And they will be liquidated at the current market values, less commissions.
With real estate in your IRA, you lose the depreciation write-off and the opportunity for capital gains.
So, I don’t think betting your retirement on this is a good idea.
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