What you need to know about investing in real assets

June 23rd, 2023 By Emily Norwood

As people seek ways to diversify their portfolios and protect their money from inflation, investing in real assets has become increasingly popular. But what exactly are real assets, and what should you consider before investing? Here’s what you need to know.

What is a real asset?

A real asset has intrinsic value due to its physical nature and traits. Real assets can include various types of physical property, such as land, buildings, and natural resources. They also include infrastructure such as toll roads, pipelines, and cell phone towers, as well as commodities like precious metals, oil, and crops. These differ from financial assets such as stocks, which get their value from underlying assets.

Regardless of their shape or size, real assets are typically seen as a long-term store of value. This is true even though they have different degrees of liquidity and marketability, depending on the specific type of asset and market conditions. Investors can use real assets for a multitude of purposes, from generating income, to serving as a hedge against inflation, to providing diversification in an investment portfolio.

Types of real assets

Real assets fall into two main categories: income-producing and non-income-producing. Non-income-producing assets are still incredibly valuable; they simply don’t earn income until you sell them.

Income-producing assets

Real estate: One of the most popular income-producing assets is real estate. These investments may include physical commercial properties like office buildings and warehouses, as well as passive income investment opportunities such as real estate investment trusts (REITs). Generally, real estate owners can generate income by leasing or reselling their property.
Franchises: When you buy a franchise, you purchase the rights to operate a business under an established brand name. In exchange, you pay upfront fees and royalties to the person who created the company. Traditionally, franchise investing has only been available to the wealthy due to the high startup costs and time commitment – but companies (like FranShares!) are changing that by making this asset class accessible to retail investors.
Farmland: There will always be demand for food, so why not get a piece of the pie? By owning farmland, you have the ability to earn income from the production of crops such as wheat and corn. You can invest directly by buying land and leasing it to a farmer, or take a more passive approach with a farmland-focused REIT.

Non-income-producing assets

Art: Fine art includes paintings, sculptures, and other forms of visual art. Art is considered a non-income-producing asset since you typically only make money from a piece if and when you sell it. Though many works of art have sold for more than their purchase price, this isn’t always the case – the value of art is subjective and can fluctuate unpredictably based on current trends, the artist’s reputation, and market conditions.

Fine wine: Certain wines may become more valuable over time and have demand on a secondary market – typically those produced in limited batches and whose quality improves as they age. Investing in rare, vintage wines can be a great way to diversify your portfolio and potentially generate long-term returns. However, wine investors should be prepared to commit significant capital to the storage and maintenance of their collection to maintain its integrity over time.

Gold: Gold complements traditional investments because of its historically low correlation to the stock market. Over time, gold has gained a reputation as a safe haven investment. That means when stocks go down, investors expect gold to retain or increase its value. One of the most common ways to buy gold is through physical gold bars and coins, or through mutual funds and ETFs that track the gold market.

Other collectibles: Collectible items such as trading cards, comic books, rare coins, stamps, and even sneakers are non-income-producing assets that may earn you a return when you sell them. Like other real assets, collectibles may offer greater portfolio diversification and a potential hedge against inflation since they tend to react differently than the overall market.

What you need to know before investing

Like every other asset class, real assets come with their fair share of benefits and challenges that investors must weigh carefully.

Benefits of investing in real assets

Diversification: Real assets tend to move differently than other asset classes, which adds a layer of diversification to your portfolio. In other words, when a traditional investment like a stock or bond performs poorly, a real asset may perform well. Real assets such as precious metals or oil may maintain or even appreciate during an economic downturn, softening the blow of stock market losses.

Inflation hedge: Inflation soared to a 40-year high in 2022, causing many investors to consider adding inflation-resistant assets to their portfolios. Real assets may perform better during inflationary periods due to their intrinsic value as tangible objects.

Income and equity appreciation: Real assets can generate income and appreciate over time. As the global population grows, for example, the demand for commodities such as oil, metals, and other natural resources may rise, driving up their prices and value.

Potential challenges of investing in real assets

Volatility: As with any investment, market volatility can impact real assets. For example, interest rates, local market dynamics, and regulatory changes can affect real estate values. Similarly, the prices of raw materials such as oil can go up or down due to supply and demand or geopolitical events.

Not liquid: Real assets are often illiquid, meaning they can’t be easily bought or sold – not good if you need to access cash quickly. This is especially true for niche collectible items such as playing cards or comic books. Since demand is lower, it can take time to find a buyer.

Gatekeeping: Some asset classes have been exclusive to big industry insiders (think high-net-worth individuals and institutional investment firms). However, companies like FranShares are making real assets accessible to the everyday investor, giving them the opportunity to own a fractionalized franchise portfolio for as little as $500.

How real asset investing differs from traditional market investments

Real assets have a low correlation to traditional market investments, meaning they may maintain or increase their value while other assets are underperforming.

For example, during periods of inflation, real estate (a real asset) may increase in value due to a rise in building materials and labor costs. This can lead to higher construction costs and, ultimately, higher property values. Similarly, commodities such as gold or oil can hedge against inflation. Why? Because their prices tend to rise during periods of inflation as their demand increases, which typically happens because investors perceive them as safer.

How to start investing in real assets

Your first step is to think about your goals, timeline, and risk tolerance. For example, if you want to invest for a short-term goal, such as a home down payment, it may be best to stick with more conservative investments like savings or money market accounts. However, investors with a higher financial and emotional risk tolerance may be well-positioned to commit capital to an asset with a longer time horizon.

Like any investment, real assets come with risks, so it’s important to weigh the pros and cons and consult your financial advisor before making any investment decisions.

Are real assets for you?

By diversifying your portfolio with real assets, you may be able to reduce the impact of inflation on your investment returns. However, it’s important to note that the effectiveness of real assets as an inflation hedge depends on several factors, such as the specific asset class, market conditions, and the overall economy.

The bottom line is that real assets can offer many benefits, but they also come with unique challenges and risks. Investors should do their due diligence and carefully consider all factors to ensure they align with their investment goals and risk tolerance.

Why FranShares

FranShares makes it easy to add franchises, our favorite real asset, to your portfolio. Instead of needing tens of thousands or even millions in the bank to start a business from scratch, you can passively invest in a portfolio of proven franchise brands for as little as $500.

To learn more about investing with FranShares, reach out to our Investor Relations team.