Simple Rules for Investing in Real Assets
March 09, 2011, By Tyler Newton 0 comments
For those of you who have been reading these columns here at Man of the House, you know that I advocate investing with a long-term focus and building a diversified portfolio. An investment portfolio consists of all assets that you own that have the potential for appreciation or that serve as a store of value. (Cars and snowmobiles don’t count.)
I group assets into three basic categories:
- Bonds and cash, which perform best when inflation is falling
- Stocks, which are ownership stakes in companies and perform best when inflation is moderately positive
- Real assets, which tend to perform best when inflation is rising
What Are “Real Assets”?
Real assets are ownership stakes in tangible items that have resale value that tends to increase with inflation due to some level of scarcity. Real assets include real estate, commodities, art, antiques, jewelry and collectibles. Some of these assets, like the art of certain artists or beachfront real estate in popular vacation destinations, will appreciate for fundamental reasons. Other real assets, like gold bullion, will appreciate in nominal terms mainly because the unit of measurement (i.e. the dollar) declines in value.
Direct Real Estate
For most of us, the biggest investment we own is our house, which produces income in the form of our not having to pay rent. For portfolio allocation purposes, the entire value of the house should be included, not just the equity in the house. Before buying a bigger house, purchasing a second home or investing in commercial real estate, try to build up your fixed income and stock portfolios to balance your real estate risk.
Financial Real Estate
If you rent your home, you can add real estate exposure on the stock market via Real Estate Investment Trusts (“REITs”). A good way to get diversified exposure to REITs is through the Vanguard REIT Index Fund (ticker: VGSIX). You can also add international real estate exposure through the SPDR Dow Jones International Real Estate ETF (ticker: RWX). These both throw off nice dividends. Please note that these dividends are taxed at ordinary income rates and thus REITs may be better held in tax-deferred accounts if possible.
NEXT: Commodities
