Experts advise investors to build a diversified portfolio to minimize volatility and generate consistent returns. One of the ways that you can achieve diversification is to add hard assets to your investment portfolio. Hard assets are investments that are tangible and have intrinsic value through good times and bad. In this article, we’ll define hard assets, provide examples and share a hard asset investing strategy for 2022.
For help investing in hard assets, consider working with a financial advisor.
What Are Hard Assets?
Hard assets are physical or tangible assets that hold their value through most economic cycles. They are normally held for the long term and provide relatively stable value compared to securities like stocks and bonds. Over long periods of time, their returns often align with inflation. This makes them a good hedge against rising prices of goods and services.
Examples of hard assets
- Real estate. Investors can buy individual properties to create their own portfolio. Alternatively, they can purchase shares in REITs that own a diversified mix of properties with professional management.
- Gold, silver, platinum and other precious metals. They investments are “stores of value” during uncertain economic times. Although precious metals have some utility in the manufacturing of products, especially platinum and palladium, they do not grow like a stock or provide income like a bond.
- Oil, natural gas and other resources. These resources are used by consumers and businesses throughout all economic cycles. While their prices tend to increase during a booming economy, they also tend to hold value during recessions because they fill a basic need. The value of these commodities generally fluctuates on a daily basis.
- Vehicles and classic cars. Investors collect certain classic cars and exotics because of their rarity and, in some cases, their personal enjoyment. These investments tend to grow over time as they become rarer to find.
- Artwork and paintings. Artwork and paintings serve as an investment, but also as decoration for your home or office. While they can be a valuable investment, they can also be quite delicate or susceptible to damage while on display. Valuing them can be difficult since they rarely change ownership and they are generally one-of-a-kind pieces.
- Collectibles. Collectibles include wine, books, coins, stamps and other items with historical or other relevance. Many of these items are popular with niche communities. They may be harder to sell or trade outside of those communities and their value may be subjective.
Why Invest in Hard Assets?
Investing in hard assets is a strategy used to reduce a portfolio’s risk and hedge against inflation. While stocks and bonds tend to change value based on company earnings, interest rates and the economic cycle, the value of hard assets tends to be based on their utility, rarity and emotional attractiveness.
The value of hard assets often aligns with inflation, so they provide a hedge against rising prices and consistent value in “real dollars.” Hard assets also offer non-correlated returns. This means that their value doesn’t rise and fall in line with the stock market.
Hard Assets Investing Guide for 2022
If you’re considering adding hard assets to your portfolio this year, here are some strategies to consider.
Hedge Against Inflation
Inflation has been running higher recently due to supply chain disruptions, COVID and a massive increase in the money supply. Central banks respond to higher inflation by raising interest rates, which can weigh on the price of equities. The value of hard assets tend to rise with inflation, so they can provide a hedge within your portfolio to maintain your balances during periods of uncertainty.
Productive Real Assets
Some hard assets generate income like a business. Investing in rental properties, commercial real estate or farmland can provide income for your portfolio. Over time, the value of real estate tends to increase with inflation, so that provides an additional return for investors.
Commodities for a Growing Economy
Commodities like oil, natural gas and others increase in value during periods of high demand. During a growing economy, more consumers and businesses use these resources for everyday activities. When a downturn happens, there is a general floor to their prices due to baseline demand for cars, heating homes and other uses.
Mix Business with Pleasure
Investors may choose certain hard assets that offer a mix of business and pleasure. These investments include artwork, classic and exotic cars and books. With these items, not only do they provide investment opportunity, but the investors can use them as well. Investors display in their homes or offices, vehicles can be driven and books can be shared or put on display.
The Bottom Line
Hard assets are tangible products that hold value for investors. There are many different ways to invest in hard assets. They are an attractive way to diversify your portfolio to reduce overall volatility. The value of hard assets generally align with inflation, which makes them a valuable hedge during periods of rising prices. However, the value of some hard assets depend on demand, scarcity and historical significance.
- Studies show that creating a diversified portfolio reduces volatility without sacrificing overall returns. Adding hard assets to your investing strategy can be a good option. It hedges against inflation and provides non-correlated returns. Our asset allocation calculator suggests different portfolios based on your risk tolerance, goals and timeframe.
- A financial advisor can help you determine your financial goals and build a portfolio that is geared towards achieving them. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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