Do Real Assets Outperform Stocks and Bonds?

The Pros and Cons of Real Assets

You know what they say about investing in land: “They’re not making any more of it.”

And you may have heard people say this about investing in wine: “If I run out of money, I can always drink it.”

The point is, real assets, whether land and water, wine, antiques, canned food or any other physical asset has an inherent value, because it can be consumed in some manner. In contrast, true financial assets (e.g. cash, stocks, bonds, etc.) do not—though you can, of course, burn cash stock certificates if you actually have possession of them.

For a number of reasons, many investors move into real assets during difficult economic times, but how do returns on real assets compare to returns in financial assets?

Real Assets vs. Stocks and Bonds

“The long-term studies I have seen indicate that over the long-term, stocks perform the best at a 10% to 11% annual return, bonds rank second at about 5% annually, and tangible assets can vary between 0% and 11% depending on what study you’re looking at for gold, real estate or other tangible assets,” explains Nicholas Newsad, co-owner and co-founder of Healthcare Transaction Advisors. “Over the short term, everything is pretty volatile. You could make or lose a lot of money on stocks or real estate in the short term.”

[Editor’s Note: While both real assets, such as land or art, and financial assets, such as marketable securities or cash, can both be categorized under the umbrella of tangible assets, this article uses the term tangible asset to refer mainly to real assets of a physical nature.] 

Statistics based on other sources are not far off: between 1965 and 2018, the S&P 500 and 10-year Treasury Bond gave investors an average annual return of 10.97% and 6.67% respectively, based on data from New York University and the St. Louis’ Federal Reserve database. Comparing $1,000 of land purchased in Iowa to $1,000 invested in an S&P 500 index fund, from 1960 to 2009, Iowa State found that investing in land produced $143,672 in value versus $83,805 in the fund’s value.

Assets and Bonds: It’s Not So Simple

The answer, really, is much more complicated than what mere statistics can demonstrate. For one, it is sort of like asking what is healthier, a steak or a salad? Without knowing the cut of meat or what the salad dressing is made from, you cannot really know. Some stock pickers are better than others, and there are just so many types of tangible assets; one cannot generalize their performance without any real meaning to context.

However, there are factors to consider beyond the market value of tangible assets (and the potential for mineral or fossil deposits) and intangible investments that determine which is the best investment for you.

One factor that does apply with all tangible assets, points out Leonard P. Raskin, president & CEO of Raskin Global, is that “the investor has to take possession, insure the assets, and when they desire, liquidate the assets. Good luck getting those barrels of oil or wheat or pounds of silver or gold shipped, stored and sold when you want to.”

Newsad, similarly, cautions investors, especially those with limited means or an aversion to extreme risk, to think about how quickly tangible assets can be converted into liquid ones.

Depending on the type of asset, such as real estate or machinery, an investor can make up for relative illiquidity by using the asset to generate income and cash flow.

On the other hand, as Jonathan Friedland, publisher of Accredited Investor Markets, points out, “The historical line between tangible and financial assets was never that bright, after all how many commodities traders actually take delivery of the underlying assets?” Friedland went on to note that “REITs and other investment funds that buy tangible assets blur the line further. While an investor in one of these funds is technically buying a financial asset because they don’t have a direct claim to the fund’s underlying assets, from the perspective of portfolio diversification, it clearly counts as an investment in tangible assets.”

Tangible assets, or more specifically, real assets, should therefore be evaluated based on more than just their performance in comparison to stocks and bonds, especially as their physical qualities become less important and the definition of “tangible” blurs. A diversified portfolio contains both financial assets and real assets to complement each other and spread risk.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds and Investing in Commercial Real Estate. This is an updated version of an article originally published on December 10, 2014.]