Monday, September 28, 2009

Why Invest in Real Assets?

As promised, I will talk about why you should invest in real assets especially when thinking about retirement. But first, I want to explain exactly what real assets are.

We all remember from our elementary school days in social studies learning about the basic human needs of food, clothing, and shelter. Well, real assets are those assets which meet those basic needs for survival. I would add transportation and energy to these basic needs as well when we get into the real asset discussion. Everybody around the globe needs these things to stay alive. You could live without the iPod, but not without food.

So, real assets are things in your possession that everyone would need virtually everyday of their lives. If you had actual physical possession of these items, that would be ideal. If not, make sure you have some solid claim to those items.

One example of a real asset is real estate. If you actually own the land, you can use it to grow food by planting a garden or keeping livestock. You could build your shelter on it. If there are trees, you could use those trees to supply the lumber for building your shelter or for fuel to heat that shelter and cook your food.

One way to think of a real asset is that there will always be a demand for it and because of this, its value will never go to zero. Land itself cannot go bankrupt. Cattle cannot go bankrupt, and they will always have value. Chrysler bonds can lose all of their value, but a tree will not. This is an important distinction when it comes to real assets. Businesses can go bankrupt and be worth nothing (take Enron for example), but real assets will always have some value to someone.

That is why you want to include these in your retirement plans. You don't want to have your retirement savings wiped out. You always want to be able to get some value out of your retirement assets. That is not to say that you can't overleverage your real assets and lose them that way. That happens a lot and is a subject for another time. But if you actually own the assets (as opposed to paying back the financing of the assets), then you are in great shape.

Next time in part 2, I will discuss how that retention of value and inflation combine to make real assets an ideal class for retirement savings. Until next time--Keep it REAL!

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