What is 'Real Asset'
Real assets are physical assets that have value due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land, machinery and oil. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets such as stocks and bonds.
BREAKING DOWN 'Real Asset'
Investing in real assets is particularly well-suited for inflationary times because of their tendency to outperform financial assets during such periods.
Most businesses own a range of assets, and they typically fall into the real, financial or intangible category. For example, imagine XYZ Company owns a fleet of cars, a factory and a great deal of equipment. These are real assets. However, the company also owns several trademarks and copyrights. These are intangible assets. Finally, the company has a few stocks in a sister company, which are financial assets.
Difference Between Real Assets and Financial Assets
Real assets are a separate and distinct asset class from financial assets. Unlike real assets, which have intrinsic value, financial assets derive their value from a contractual claim on an underlying asset which may be real or intangible. For example, commodities and property are real assets, but commodity futures, exchange-traded funds (ETFs) and real estate investment trusts (REITs) constitute financial assets whose value depends on the underlying real assets.
Advantages and Disadvantages of Real Assets
Real assets tend to be more stable than financial assets. Inflation, shifts in currency values and other macroeconomic factors affect real assets less than financial assets. However, real assets also have lower liquidity than financial assets, as they take longer to sell and have higher transaction fees in general. Finally, real assets have higher carrying and storage costs than financial assets.
Difference Between Financial Assets and Intangible Assets
Intangible assets include trademarks, brand recognition and other intangible items, but this asset category does not include stocks and bonds. Similarly, financial assets include stocks and bonds, but the category does not include goodwill, patents or other intangible assets.
Difference Between Tangible and Intangible Assets
Tangible assets include stocks, bonds, property, cash, vehicles and a host of other things, while intangible assets include only a small sliver of items. Tangible assets include both financial and real assets, while intangible assets include items that exclusively fall into the intangible category.
For tax purposes, the Internal Revenue Service (IRS) requires businesses to report intangible assets differently than tangible assets, but it groups real and financial assets together under the tangible asset umbrella.