What Is a Hard Asset and why is it important to your portfolio?

Building a diversified asset is vital in today's economy, and one way to do it is to include hard assets in your portfolio.

If you wonder what is a hard asset, keep reading to learn the benefits of adding them to your portfolio.

What Are Hard Assets?

Hard assets are tangible assets, unlike non physical assets, that have value, and most investors hold onto long-term. Both individual and commercial investors can have hard assets in their portfolios, and the assets hold their value throughout various economic cycles.

Hard assets usually last for more than one year, and most assets are a hedge against inflation, meaning their value increases with inflation.

Understanding Hard Assets

Investing in hard assets can be an excellent way to diversify your portfolio since they hedge against inflation.

However, many investors need to leverage their investment to buy hard assets by borrowing money rather than paying for the asset in cash. If there isn't a way to finance the purchase, consider the large amount of capital outlay since you tie up your funds when you invest in a hard asset.

You can invest in hard assets that produce income, like a business or assets that appreciate over time but don't produce monthly income. But, again, remember how long you must tie up your capital in the fixed assets to ensure you aren't putting yourself in a financial bind.

Soft Assets

Soft assets are those aspects of a company that cannot be easily quantified or measured but which can nonetheless create value for the business. Unlike tangible assets like assembly machinery and commercial vehicles, examples of soft assets include things like computer software and hardware, office furniture, POS systems, HVAC systems, security devices, and so on. While these factors may not show up directly on the balance sheet, they can nonetheless be extremely important to the long-term success of a company.

Pros and Cons of a Hard Asset

Like any investment, hard assets have pros and cons. Understanding the good and bad of investing in such assets can help you determine what's suitable for your portfolio.

Pros:

• Hard assets aren't tied to the stock market. When the stock market performs poorly, hard assets tend to be unaffected or may even react the opposite way. They are hardly affected by economic factors, and when they are, it takes a while for the effects to show.
• They are a good hedge against inflation. In today's high inflationary times, we need every hedge against inflation we can muster. Hard assets usually increase in value, not decrease like most equities, making them a good asset to diversify your portfolio.
• You might earn income. Some hard assets earn income, like a business or rental property. If you earn monthly income, it's an even larger bonus for investing in hard assets. The income is separate from the asset's appreciation, which means you might make more money when you sell the asset too.
• You can collect items and consider them an investment. Some hard assets are collectibles, such as artwork or cars. You collect the items because you enjoy collecting them, but they can also increase your net worth by investing in them.
• You have something to show for your money. Investing in hard assets gives you something to show for your capital. For example, when you invest in a stock, you have nothing to show for it except a certificate. Hard assets have intrinsic value and are something you can show.

Cons:

• There's always a risk of loss. Any asset can lose its value during an economic downturn. While hard assets are a hedge against inflation, no asset is immune to adverse effects of the economy. Be careful with how much you invest to protect your capital.
• Hard assets are hard to liquidate. Unlike stocks you can sell on the open stock exchange during market hours, you can't sell hard assets quickly. The buyer pool is usually small, and transferring a fixed asset like property could take months.
• Hard assets typically require a lot of capital. Most investors need a large outlay of cash to invest in hard assets unless they can leverage their investment with financing.

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Reasons to Invest in Hard Assets

Like any asset, there are plenty of reasons to invest in hard assets, including the following.

Yield

In the inflationary market we're experiencing, most assets don't have a positive yield; if they do, it's low.

Hard assets aren't as affected by economic issues, and they don't lose a lot of value overnight. Their values may fluctuate, but nothing compared to the ups and downs the stock market experiences.

Higher Total Returns

Since hard assets are long-term assets, there are usually much higher returns. When you invest in something for a long time, it has more time to appreciate than short-term assets that are more affected by the economy's small changes.

If you can hold onto fixed assets for a longer time, you have a higher chance of earning higher returns.

Valuation

We discussed how hard assets require a much larger capital outlay than soft assets, which means they have a higher value. Since a hard asset holds its value much longer than a soft asset, you have a better chance of earning profits when you liquidate the asset if you sell it at the right time.

Limitations and Risks of Investing in Hard Assets

As we said earlier, investors face some limitations and risks when investing in hard assets. They include:

• Illiquidity - Hard assets don't sell overnight. They can take months or longer to sell. If you tie up all your cash in them, it can cause financial issues down the road.
• Capital needs - Only investors with a lot of available capital can invest in hard assets. They usually don't come cheap.
• Affected by political and environmental issues - The value of hard assets can change drastically with political and environmental issues, sometimes unexpectedly. Doing your due diligence before investing can offset this risk.

Hard Assets vs Intangible Assets

A hard asset and an intangible asset are complete opposites. Hard assets are tangible, meaning you can see and touch them. Intangible assets, on the hand, you cannot see or touch. Common examples include copyrights, patents, trademarks, and securities investments.

Examples of Hard Assets

Here are some examples of hard assets:

• Real estate - You can buy real estate property yourself or invest in real estate investment trusts from a company like Concreit and earn monthly dividends and appreciation when the asset matures. Either way, if you or the REIT sells the property for a profit, you make money, but it's usually a long-term asset.
• Precious metals - Investing in precious metals is a hard asset investment that usually withstands inflation and economic downturns. You can sell the investments when prices are higher and make a profit.
• Classic cars - Typically, cars depreciate, but collectible or classic cars hold their value and even increase over time. As the cars become harder to find, their value increases, earning you more profits when you sell.
• Artwork - Art collectors have hard assets that they can enjoy, and that can make them a profit. You need an eye for which art is worth money and will appreciate as it becomes harder to find.

The Bottom Line

Hard assets are tangible assets that hold intrinsic value for the long term. They are a great way to diversify your portfolio and hedge against inflation. For example, you can invest in real estate or other collectibles. Decide where your interests lie and which tangible assets you want in your portfolio long-term. Learn more by signing up and visiting our blog.

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