In the realm of finance and investments, the term “alternative investments” often sparks curiosity and interest among investors seeking to diversify their portfolios beyond traditional stocks and bonds. Tangible assets, in particular, stand out as a compelling avenue within this domain. In this blog post, we delve into tangible assets as alternative investments, exploring their definition, benefits, and potential drawbacks.

What is a Tangible Asset? 

First things first, you need to know what qualifies as a tangible asset.

Tangible assets are physical items or properties that hold inherent value. They can range from real estate properties and fine art to antique collectibles, rare wines, gold, and exquisite jewelry. Unlike stocks or bonds, which are intangible and exist solely as financial instruments, tangible assets offer a palpable and often rewarding form of investment.

The variety of tangible investments is never-ending—if you see value in an item, it can technically qualify as a tangible asset if there is a market for it. However, because the definition of a tangible asset is so wide, the more niche the asset, the less accessible the corresponding market will be. For example, the market for collectible comic books is likely much smaller than that of fine jewelry, but that doesn’t mean that comic books aren’t valuable. Just this past April, a copy of Action Comics #1 sold for $6 million.

Why Consider Investing in Tangible Assets?

Tangible assets are rapidly gaining popularity. As investors seek alternative investments, tangible assets are often the first stop. There are 4 main benefits to investing in tangible assets:

1. Risk Mitigation: Tangible assets serve as a hedge against the volatility of traditional financial markets. While stocks and bonds may fluctuate in value due to market dynamics, tangible assets possess a tangible presence that can provide stability to an investment portfolio.
2. Protection from Inflation: In times of economic uncertainty, tangible assets often retain or even appreciate in value. Real estate, for instance, tends to maintain its worth over the long term, making it a reliable store of wealth during times of high inflation.
3. Portfolio Diversification: Diversifying one’s investment portfolio is a fundamental strategy for risk management. By allocating a portion of funds to tangible assets, investors can reduce their overall portfolio risk and enhance their chances of achieving stable returns across various market conditions.
4. Interest Oriented: Investing in tangible assets is a great way to invest in something that you’re passionate about. Tangible assets have the power to help you build wealth and invest with a purpose. Do you love antique cars? Do you get a thrill shuffling through old vinyl records? There’s a market for those things that can be very valuable.

For a tangible asset investment to be successful, it’s important to plan ahead and strategize how you can get the most value out of your asset. But when is the best time to start investing in tangible assets? The answer is when your portfolio is ready. Tangible assets are considered to be a stable investment, so the right time to get started is when your risk tolerance and diversification goals align.

Disadvantages of Investing in Tangible Assets

While there are certainly many benefits to investing in tangible assets, there are also a few drawbacks investors should consider.

1. Risk Factors: While tangible assets offer diversification benefits, they are not immune to risks. Changes in consumer preferences and severe economic downturns can all impact the value of tangible assets. Take buying a new home, for example. If you purchase a home in the perfect neighborhood and location, but a year down the road, a cemetery, junkyard, or gun range pops up down the street, your home’s value will decrease. 
2. Security Concerns: Certain classes of tangible assets, such as fine art or rare collectibles, may be susceptible to theft, fraud, or damage. Safeguarding these assets often requires additional security measures and insurance coverage, adding to the overall cost of ownership.
3. Illiquidity: Unlike stocks or bonds, which can be easily bought or sold on financial markets, tangible assets may lack liquidity. Selling a piece of real estate or a valuable artwork can be a time-consuming process, limiting investors’ ability to swiftly liquidate their holdings in times of need.

Investing in Tangible Assets: Is It Right For You? 

Exploring the realm of tangible assets as alternative investments unveils a diverse landscape of opportunities and challenges. While these investments offer many benefits, including inflation protection and portfolio diversification, they also pose inherent risks and logistical complexities. 

As with any investment decision, investors need to thoroughly research their options, carefully evaluate the present risk factors, and consult with a financial professional before investing. Ask important questions during this time, including:

• Do you understand how the business model works?
• Are there any maintenance costs with this investment?
• Will the investment contribute to the diversification of your portfolio?
• What is the timeline of this investment?
• Are you factoring in taxes?
• Will you need an expert to help you with this investment long-term?
• Are there any risk factors you haven’t considered before, like security?

These questions will help you better understand the investment so you can make an informed decision as to whether or not it’s the best fit for your portfolio. By incorporating tangible assets into a well-rounded investment strategy, you can achieve long-term financial stability and resilience in an ever-evolving market.

As you consider how to effectively diversify your portfolio, we recommend consulting a professional. If you need recommendations on financial professionals or are interested in Hedgehog’s alternative investment model, get in touch with our team.

Disclaimer:

This material is intended for informational purposes only and should not be construed as legal or tax advice. Information here is not intended to replace the advice of your investment advisor or financial advisor. This information is not an offer or a solicitation to buy or sell securities. This information may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.