In the financial world, various investment options claim to yield unprecedented returns and outperform others over time. However, not all of them can stand the test of time and ensure consistent growth. One such lesser-known investment strategy, comprising real assets, has outperformed the S&P 500 for the past 30 years, without a single negative year.
What are Real Assets?
Real assets are tangible, physical assets that have intrinsic value due to their substance and properties. These assets often exhibit a low correlation with traditional financial investments such as stocks and bonds, which makes them an ideal addition to a diversified investment portfolio. The real assets in question consist of a balanced mix of infrastructure, farmland, and timber forests. These three components work collectively to provide the safety and growth that outpace the S&P 500.
Infrastructure Investments
Infrastructure investments are an essential component of real assets. They involve investing in large-scale projects responsible for supporting the functioning of a society. This includes sectors like energy, transportation, water systems, and communication networks. These investments may take the form of public-private partnerships or direct investment in companies operating in these industries.
Investments in infrastructure can provide a reliable and stable income, primarily driven by predictable cash flow, long-term contracts, and a high barrier to entry. Additionally, infrastructure assets are capital-intensive, which can deter competition and generate better returns for investors.
Farmland Investments
Farmland investments consist of investing in agricultural land utilized for growing crops or raising livestock. This type of investment can be highly profitable due to increasing global food demand, driven by population growth and economic development. Farmland investments generate income from leasing the land to farmers who pay rent or through the production and sale of crops or livestock.
Investing in farmland offers benefits such as inflation protection, capital appreciation, and diversification across various crops and locations. Additionally, as arable land becomes increasingly scarce due to urbanization, investments in farmland are poised to become more valuable.
Timberland Investments
Timberland investments focus on acquiring and managing land containing forests for timber production. Mature forests produce an annual harvest, generating a steady cash flow for investors. Moreover, trees grow faster and become more valuable over time, providing investors with an appreciation in the value of their asset.
Investing in timberland has advantages such as asset diversification, inflation protection, and environmental benefits associated with sustainable forestry. As demands for timber and wood products are steadily increasing, investments in timberland are likely to yield significant returns.
Performance during Economic Downturns
Real assets have displayed a remarkable resilience during periods of economic turmoil. During the 2008 Great Financial Crisis, the real asset index remained positive and stable despite stocks experiencing highs and lows. Similarly, in the 2020 COVID-19 pandemic, the real asset index remained unaffected, revealing the relative stability of real assets compared to traditional investments like stocks.
Comparing Investments: Real Assets and S&P 500
To further exemplify the impressive performance of real assets, consider an investment made in the real asset index on its worst day ever. One year later, that investment would yield a positive return of 1.5%. In contrast, investing in the S&P 500 under similar circumstances would have resulted in a 38% loss.
Finding Access to Real Asset Investments
Unfortunately, retail investors may have difficulty finding direct investments in real assets. However, working with an investment advisor or fiduciary may provide opportunities to include real assets as part of a diversified portfolio. They can assist in navigating the complex real asset investment landscape and recommend suitable strategies based on individual financial goals.
Conclusion
Real assets offer an exciting avenue for investors aiming to diversify their portfolio and achieve long-term growth. The unbeaten track record of infrastructure, farmland, and timberland investments in outperforming the S&P 500 and maintaining positive growth, even during economic downturns, makes them a lucrative choice for stable and secure returns. Working with an experienced investment advisor can ensure the right mix of assets for individual investors and help them secure financial success.
Frequently Asked Questions
What are real assets?
Real assets are tangible, physical assets that have intrinsic value due to their substance and properties. They often exhibit a low correlation with traditional financial investments such as stocks and bonds. Real assets primarily include infrastructure, farmland, and timber forests.
What are infrastructure investments?
Infrastructure investments involve investing in large-scale projects responsible for supporting the functioning of a society. This includes sectors like energy, transportation, water systems, and communication networks. These investments can provide a reliable and stable income, mainly driven by predictable cash flow, long-term contracts, and a high barrier to entry.
What are farmland investments?
Farmland investments consist of investing in agricultural land used for growing crops or raising livestock. They generate income from leasing the land to farmers who pay rent or through the production and sale of crops or livestock. Farmland investments offer benefits such as inflation protection, capital appreciation, and diversification across various crops and locations.
What are timberland investments?
Timberland investments focus on acquiring land containing forests and managing them for timber production. Mature forests produce an annual harvest, generating a steady cash flow for investors. Investing in timberland has advantages such as asset diversification, inflation protection, and environmental benefits associated with sustainable forestry.
How do real assets perform during economic downturns?
Real assets have displayed remarkable resilience during periods of economic turmoil. Examples include the 2008 Great Financial Crisis and the 2020 COVID-19 pandemic when real asset indices remained positive and stable, despite stocks experiencing highs and lows.
How do real assets compare to investments in the S&P 500?
Real assets have outperformed the S&P 500 for the past 30 years, without a single negative year. Even when investing in the real asset index on its worst day ever, one year later, that investment would yield a positive return of 1.5%. In contrast, investing in the S&P 500 under similar circumstances would result in a 38% loss.
How can retail investors access real asset investments?
Retail investors may have difficulty finding direct investments in real assets. However, working with an investment advisor or fiduciary may provide opportunities to include real assets as part of a diversified portfolio. They can assist in navigating the complex real asset investment landscape and recommend suitable strategies based on individual financial goals.
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