Why Investing in Hard Assets Offers Downside Protections: A Guide for Savvy Investors
Investing can be a rewarding but risky endeavor, especially in times of economic uncertainty. With so many investment options available, it can be challenging to determine which strategy offers the best protection against risk. One investment strategy that has proven effective is maintaining a diverse portfolio. One option to achieve diversification is to consider non-traditional assets such as investing in hard assets.
In this article, we will discuss the benefits of investing in hard assets and why they offer downside protection. We'll also explore some common questions investors have about this type of investment, and provide practical tips for incorporating hard assets into your portfolio.
What Are Hard Assets?
Before we dive into the benefits of investing in hard assets, it's essential to understand what they are. Hard assets are tangible assets that have intrinsic value and can be used for productive purposes. These assets include real estate, commodities, and precious metals such as gold and silver.
Unlike financial assets like stocks and bonds, hard assets have inherent value that is not fully dependent on the performance of the economy or the financial markets. This means that they can provide a level of protection against downside risk that financial assets cannot.
Why Investing in Hard Assets Offers Downside Protections
Inflation Hedge: Hard assets like real estate and precious metals have historically served as a hedge against inflation. Inflation erodes the purchasing power of currency, but hard assets tend to appreciate in value as prices rise. This makes them an excellent hedge against inflation and helps protect investors from the eroding effects of inflation.
Diversification: Investing in hard assets can provide diversification benefits to an investor's portfolio. Diversification means investing in a range of assets that have different levels of risk and return characteristics. By adding hard assets to a portfolio that already includes financial assets, an investor can reduce their exposure to the ups and downs of the financial markets.
Safe Haven: Hard assets like gold and silver are often considered safe haven assets. This means that they tend to perform well during times of economic uncertainty or market volatility. When financial assets like stocks and bonds are experiencing significant fluctuations, hard assets can provide stability to a portfolio and help investors weather the storm.
Tangible Value: Hard assets have intrinsic value that is not completely tied to the performance of the economy or the financial markets. This means that they are less vulnerable to fluctuations in the financial markets and can provide a level of downside protection to an investor's portfolio.
How to Invest in Hard Assets
Investing in hard assets can be done in a variety of ways, depending on the type of asset and the investor's preferences. Here are some common ways to invest in hard assets:
Real Estate: Investing in real estate can be done through direct, active ownership or through passive ownership from real estate syndications or real estate funds. Direct ownership involves purchasing a property and renting it out or flipping it for a profit. Passive ownership is achieved through real estate syndications or funds wherein investors pool their money to purchase large real estate properties or real estate related assets and receive monthly, quarterly or yearly cash flow distributions as well as a large lump sum at exit from a capital event.
Commodities: Investing in commodities can be done through futures contracts or exchange-traded funds (ETFs). Futures contracts allow investors to bet on the future price of a commodity, while ETFs provide exposure to a range of commodities.
Precious Metals: Investing in precious metals like gold and silver can be done through physical ownership, futures contracts, or ETFs. Physical ownership involves purchasing gold or silver coins or bars and storing them in a safe deposit box or a secure storage facility. Futures contracts and ETFs provide exposure to the price of gold and silver without the need for physical ownership.
Are hard assets risk-free investments?
Of course not. No investment is entirely risk-free, and hard assets are no exception. However, investing in hard assets can provide a level of downside protection that financial assets cannot. This is because hard assets have intrinsic value that is not dependent on the performance of the financial markets. While hard assets may be subject to fluctuations in their value, they tend to be less volatile than financial assets.
Is investing in hard assets only for wealthy investors?
No, investing in hard assets is not just for wealthy investors. There are various ways to invest in hard assets that are accessible to investors of all income levels. For example, investing in gold and silver can be done through ETFs that have low minimum investment requirements.
How much of my portfolio should I allocate to hard assets?
The amount of your portfolio that you allocate to hard assets depends on your investment goals and risk tolerance. Generally, financial professionals recommend that investors allocate a portion of their portfolio to hard assets to provide diversification and downside protection. The exact amount will vary depending on factors such as your age, income, and investment objectives.
Investing in hard assets is a smart strategy for investors looking to protect their portfolios from downside risk. Hard assets like real estate, commodities, and precious metals have intrinsic value and can provide a level of stability and diversification that financial assets cannot. By incorporating hard assets into your investment portfolio, you can reduce your exposure to the ups and downs of the financial markets and achieve a more balanced and secure portfolio.
Remember that investing always involves risks, and it's essential to do your due diligence before investing in any asset class. Consult with a financial professional to determine the best investment strategy for your goals and risk tolerance. With careful planning and a diversified portfolio that includes hard assets, you can protect your wealth and achieve your financial objectives.