Banks and asset managers are happy to recommend tangible assets when inflation rises or clients fear market crises. But gold, real estate and other real assets such as forests, airplanes and raw materials are not saviors. Some of them harbor high risks that investors should be aware of. When it comes to real assets, most investors think of gold and real estate first . But stocks are also real assets. They certify a share in a company and thus in its production capital, for example in machines, buildings, trademarks and patents. Gold and real estate in particular have enjoyed increasing popularity since the banking crisis of 2008 swept the globe and pushed a number of euro countries to the brink of national bankruptcy.
Banks and fund companies also promote a large number of other tangible assets. These include investments in wind parks, forests, arable land, dairy farms, infrastructure facilities such as ports, hospitals, retirement homes and day-care centers, diamonds, art, antiques, vintage cars and of course in raw materials such as oil and copper.
Real assets can protect against total loss in a crisis
The legitimate hope that such real values will not become completely worthless during an economic catastrophe is linked. They are intended to help maintain assets in difficult times. Above all, they should protect against inflation , but also against the consequences of government bankruptcies and currency crises. In most cases, however, it is very questionable whether tangible assets are an effective insurance against rising prices, as numerous studies suggest. But in the event of extreme market distortions, at least in the past, investors did not suffer a total loss.
Inflation is eating away at nominal values
The owners of financial assets and government bonds fared much worse . Your savings vanished almost overnight. Cash, bank balances, and debt securities such as bonds are so-called face values. Their monetary value is fixed. The price at which a bond has to be repaid at the end of its term is determined when it is issued, as is the annual interest rate. These two sizes cannot be shaken. When inflation is high, with inflation rates higher than interest rates, the real money value of the bond, measured by purchasing power, falls. This can go so far that investors can no longer buy anything for the repayment amount, as was the case during the hyperinflation.
Cash is particularly vulnerable to inflation
Interest-free cash is even more susceptible to inflation than bonds. The nominal monetary value of coins and banknotes is set by law by the central banks. The purchasing power of these means of payment is falling in step with inflation.
While bonds are often backed by assets and the issuer’s economic strength guarantees their repayment, cash and bank balances are claims against the central bank. After the Second World War they were backed by gold in the Bretton Woods system of fixed exchange rates until 1971. Central banks could exchange US dollars for the yellow precious metal at a fixed ratio at the US Federal Reserve. Today, independent central banks guarantee monetary stability in industrialized countries. The money they issue is covered, among other things, by foreign exchange reserves, i.e. by claims against other countries. People trust that the central banks will not print too much money and thereby devalue it. But this confidence has apparently continued to decline after the Internet bubble burst at the beginning of the new millennium and in the wake of the banking and sovereign debt crisis.
The disadvantages of real assets
Compared to nominal investments, real assets seem to be something tangible. But if you take a closer look, you will also discover disadvantages and dangers, which often make an investment seem less promising. Many real assets are not liquid. This means that they are not traded on legally regulated exchanges. Investors cannot sell them easily at any time. This applies to real estate, forests, fields, aircraft, ships and many other tangible assets. In addition, very few investors are so rich that they can buy their own forest or a shopping center. Private investors usually have to invest in such properties through funds. These are mostly so-called closed investments , which are associated with high costs and risks. Investors should therefore avoid them. An exception are so-called private placements, which are not publicly advertised and well-heeled investors may only be offered under the counter.
Real values are risky
For less wealthy private investors, it is more likely that there are real assets traded on the stock exchange: stocks, gold and raw materials. However, such investments in real assets are sometimes associated with much higher risks than bonds from solid issuers or interest-bearing bank balances that are protected by the deposit guarantee. Shifts should therefore be considered very carefully. If, for example, you are not investing time deposits that have matured securely with interest and instead buy gold, you may have purchased good insurance against financial market disasters. At the same time, however, you expose yourself to considerable price fluctuations and a risk of loss that becomes greater the less likely a crash appears on the stock exchanges. The bottom line is that you may have exchanged a comparatively low risk for a significantly higher one. You should always remember when planning to move from safe assets to tangible assets.