Balance between the kinds of Investment

In the winter of 1929, Paul faced huge losses in financial assets, after investing his life savings in shares of the company ‘Wade Bales’. Due to the Great Depression, many companies faced plummeting sales and subsequent fall in share prices. Due to this, Paul was forced to put his house up on the market to repay his debts and sustain living for his family. This kind of situation could have tactfully been avoided had Paul split his investments between real and financial assets.

Many investors and businesses alike find themselves in this financial predicament. Due to the risky and volatile nature of financial assets and the limited liquidity of real assets, advisors recommend a balance in investment between the two. With a balance, losses tend to create less of a blow on investors and gains are more gradual and reliable.

Financial assets are those assets which are non – tangible and monetary in nature. These include shares, stocks, and bonds. One of the many benefits of financial assets is their liquidity. Liquidity is he ease with which any asset can be converted to cash. Financial assets have higher liquidity than real assets, as shares and stocks can easily be traded in the market with cash obtained very quickly, whereas trading of real assets like real estate have to be done over a long period of time. The same drawback applies to the value also. Shares and stocks are continuously being traded in the market, therefore there is always an absolute value for your assets. However, in the case of commodities like property and paintings, the value is often hard to determine and is inexact.

Other advantages of financial assets include an additional source of income, like dividends. One of the key characteristics of financial assets is their non – tangible nature, meaning they consume no physical space and no costs such as insurance or maintenance are charged.

Another factor to be considered in investment is the rate of returns. Rate of returns is how high or low the return earned is from the invested. In the case of financial assets, the rate of returns are known to be earned quicker, and can be extremely low or high. Though his sounds promising, it  can be risky and real assets have a much more stable, predictable, and controllable rate of returns, though the amount received may not be as much.

As opposed to financial assets, real assets are said to be more reliable. Real assets are assets which are tangible, and are subject to physical changes over the course of time. The main benefit of real assets is the ability to predict gains and losses and act accordingly. A holder of a real asset also has greater ability to influence the value of their asset than a shareholder, like in the case of real estate. Due to the increased reliability and security in real assets, it is also easier to take and repay investment loans.

Overall, both financial and real assets have their benefits and drawbacks. The liquidity in financial assets and the reliability in real assets are equally important in investment, thus a balance should be maintained.

By Valli, Grade 11A