Investments: Real or Financial ?

Confused how to diversify the investment? This anecdote will help.

On one cold frosty winter, Paul sits on a park bench recollecting the bad decision that ruined his life. A few months before now, Paul invested his savings on a very large mansion, hoping that he could rent it out and make money. Paul appeared to be happy about his decision. However, some weeks after Paul buys the house, it is hit by a

heavy storm and an earthquake that ends up destroying the place. Paul now has no saving and a broken house to mend. He sits on the park bench analysing how he could have avoided this situation.

Paul understood that he had invested all his savings on one asset--instead, he could have invested in diverse assets, both real and financial.

Real assets are tangible assets and are less liquid in nature. A house or any property is an example of a real asset. These assets are generally invested in with large amounts of money and are good long-time investments. The value for real assets is more likely to increase in the future. For example, a house for fifty lakh rupees, ten years ago, may be worth more than two crore rupees now. To begin with, real assets are less liquid. This means that it would take longer time to exchange these assets for money. This can be difficult, especially if you end up needing money in an emergency. Adding on, real assets also have maintenance or storage costs. This is not required for financial assets.

Financial assets are monetary assets that are not tangible. These assets have greater liquidity, which means that they can be easily turned into cash when required. Shares and bonds would be a good example of financial assets. They do not have any extra maintenance or storage costs as they are just monetary in nature. However, investing in these assets would require basic knowledge of the market to predict effects on them.

Therefore, an investor is more likely to make more money if he or she invests in both financial and real assets, instead of exhausting all funds on one.
 
Paul could have bought a small house as well as invested in shares to avoid his situation. This way he could have made profit through the rent as well as the dividend he would earn. Even in the case of natural disaster, he could have easily liquified his financial assets to get quick cash and would have avoided landing in the state of financial bankruptcy, making him a smart investor.

So, next time try to distribute funds between real and financial assets.

By Akshita Grade 11-A