Table of Contents Hide
- What are Hard Assets?
- Investing Hard Assets
- Long-term vs. short-term hard asset
- Intangible Asset vs. Hard Asset
- Hard Assets as an Example
- How do businesses pay for hard assets?
- The Dangers of Investing in Hard Assets
- Hard Assets FAQs
- What is the difference between a hard and soft asset?
- What's the most liquid asset?
- What are some unique assets?
Organizations typically invest in a wide range of assets that contribute to their income as well as the general efficiency of their manufacturing processes. Hard assets are an especially excellent investment since they provide firms with tangible value and utility. In this article, we define a hard asset, present examples of hard assets, examine the distinction between an intangible asset and a hard asset, and illustrate how businesses pay for an account for a hard asset’s inherent value. We’ll also look at some options for hard assets investing.
What are Hard Assets?
Hard assets are physical or tangible assets that have value and are typically held for a lengthy period of time. Aside from tangibility, they are also visible and are regarded as an investable asset due to their intrinsic value. Hard assets can be purchased and owned by businesses and people in order to improve revenue and output.
Hard assets are non-perishable and have inherent value. They also serve as an inflation hedge because their value varies inversely with the value of soft and non-physical assets. Such an inverse relationship, however, does not always hold true. Hard assets, as an investment alternative, give security during times of uncertainty, market instability, and volatility. They preserve their value regardless of how much their market prices fall.
What criteria define a Hard Asset?
Because they have inherent worth, hard assets differ from “soft assets” such as stocks and bonds. This inherent worth is what allows these assets to hedge against inflationary increases.
An asset has intrinsic value if its supply is naturally limited (or rare) and it may be used to generate or purchase a good or service that meets a fundamental, basic human need. Gold and diamonds, for example, can be used to both buy and sell products and services. Similarly, oil and natural gas can be used to trade or manufacture commodities. However, the value of paper money can be discounted to zero. Similarly, it cannot be utilized to create a product that meets a basic need.
In the case of real estate, both land and any structures built on it can service basic needs, and both are naturally scarce. As a result, a property can be seen as two distinct commodities. The land itself is one commodity, while the structure on the land is another.
Purchasing Hard Assets
Hard assets that are fixed assets typically include capital investment decisions for a company’s executive management team. These assets typically need a significant outlay of cash or capital and, as a result, are seen as long-term funding considerations. Banks, venture capital firms, the sale of corporate bonds or debt, and the issuance of additional shares of stock can all provide finance for large-ticket hard assets. The capital expenditure in hard assets, such as a new manufacturing plant, indicates that the corporation intends to use the facility to create revenue for many years.
The Worth of Hard Assets
Because they may be used to manufacture or purchase other commodities or services, hard assets are thought to be particularly valuable. They can also be sold to generate cash if the company runs into financial difficulties. Analysts derive a part of a company’s underlying value from the value of its hard assets when calculating its intrinsic value.
A company’s intrinsic value is calculated by assessing its cash flow, assets, prospective revenue streams, and cost structure, among other things. When valuing a corporation, hard assets come into play since they can be sold for cash to pay off obligations, bondholders, and shareholders in the case of financial trouble or bankruptcy.
Investing Hard Assets
- Individuals and businesses are clamouring hard assets as alternative investment possibilities. Because of their tangibility and physicality, such assets appeal to some investors. Hard assets can be good investments because they provide advantages that other investments do not.
- Traditional portfolios of stocks and fixed-income instruments benefit from hard asset investments because they diversify them.
- The investments provide competitive returns that potentially outperform the majority of traditional investing assets.
- Hard assets are also highly correlated with inflation, making them ideal hedges.
- By integrating hard assets in the asset mix, it is possible to improve the risk/reward profile of a portfolio.
- Because hard assets have a low correlation with traditional investments like stocks and bonds, their presence provides value to a portfolio through diversity.
- Investment in hard assets does not necessitate constant or daily checks, unlike stock investing, where every piece of news about the stock might alter the price. It is a sit back and watches investment with hard asset investing.
- In a typical stock market day, hard assets do not lose more than 10% or 50% of their value. Their value deteriorates gradually.
Hard Assets Investing Possibilities
The performance drivers that drive mainstream stocks differ significantly from those that drive hard assets. When market conditions change, the two asset groups react differently. During periods of global expansion, low inflation, and high-interest rates, hard assets tend to outperform equities. Equities, on the other hand, tend to outperform hard assets during periods of slow growth and low inflation.
If global financial agencies such as the IMF and World Bank forecast strong global growth and favourable consumption patterns for commodities and basic metals, the aforementioned circumstances create an opportunity for hard assets investing.
Other prospects stem from optimistic growth projections for global industry and manufacturing powerhouse countries that use hard assets such as commodities and natural resources, most notably the United States, China, Japan, and Germany.
Forecasts of a warming global economy indicate growing inflation, which most investors view as a cause for concern. However, it is a situation in which investing in hard assets might be favourable. A hard asset investment as part of a portfolio will provide a buffer against inflation as well as diversification benefits.
Long-term vs. short-term hard asset
Hard assets can be classified as either long-term or short-term assets. Long-term hard assets, such as machinery, are also known as fixed assets since they retain their worth and usefulness for an extended period of time and typically contribute to the creation of services or goods by an organization. These assets typically have a life span of more than a year.
Fixed assets can either depreciate steadily overtime or increase in value, depending on the asset. Real estate, for example, typically increases in value over time, whereas machinery frequently diminishes in value after a long period of time. Short-term assets, often known as current assets, such as inventories of raw materials, on the other hand, are typically consumed or sold much more swiftly. In fact, in some circumstances, current assets are cash or can be easily converted to cash within a year.
Other Examples of hard assets include:
- Goods or products for sale by the company
- Treasury notes
- Deposit certificates
- monies owed to the business
- Debt instruments
- Expenses prepaid
- Long-term investments
- Drafts from banks
- Equity in liquidation
Though both long-term and current assets are hard assets, the main distinction between the two is that while current assets can be converted to cash rapidly, fixed assets cannot offer a corporation instant financial benefits.
For example, if a furniture manufacturer is seeking for new equipment for their assembly line, they will need to purchase both the machinery and the raw materials used in the manufacturing process. The machinery and raw materials are also considered hard assets.
Because the assembly line equipment will be used for many years, it is classified as a long-term hard asset. The raw materials, on the other hand, are expected to be consumed within the year, thus they are classified as current hard assets.
Intangible Asset vs. Hard Asset
Intangible assets, which are non-physical assets that are used throughout time, are the polar opposite of hard assets. Intangible assets include the following:
- A company’s brand
- Securities investments
Technology firms have a lot of intangible assets because they have patents for their goods and a lot of capital invested in research and development. Oil firms, on the other hand, have a large number of hard assets, such as oil rigs and drilling apparatus.
Hard Assets as an Example
Ford Motor Company (NYSE: F) is a vehicle and truck manufacturer based in the United States. The executive management team of the company is looking to purchase new machinery for their assembly line. Steel and aluminium will also be purchased by the corporation for the rivets. All of the assets, including machinery, steel, and aluminium, are classified as hard assets.
Assembly equipment is a long-term hard asset. Steel and aluminium raw materials, on the other hand, are current assets because their inventory will most certainly be depleted within a year. Intangible assets include any patents on the equipment.
How do businesses pay for hard assets?
When a hard asset is also a fixed asset, the senior management team of the firm must normally make a capital investment decision before the purchase. This is because these types of assets are frequently regarded as long-term funding decisions due to the significant amount of capital involved. Firms will sometimes: to fund the purchase of expensive hard assets, companies will:
- Create and sell new stock shares
- Make debt or business bonds available.
- Apply for a bank loan
- Obtain investment from a venture capital firm.
How are hard assets accounted for in calculating a company’s intrinsic value?
Because hard assets are frequently employed to aid in the creation or purchase of other services or goods, they are highly valued. Companies can also sell them to earn revenue if they are experiencing financial difficulties. For these reasons, analysts allocate a portion of a company’s underlying value to its hard asset assets when calculating the organization’s intrinsic value. The intrinsic value of a corporation refers to its total determined value after accounting for factors such as its:
- Structure of costs
- Future revenue projections
- Flow of funds
In other words, because a corporation can sell hard assets to pay off shareholders, bondholders, or debts in the event of a financial crisis, they play a significant part in estimating the organization’s value.
The Dangers of Investing in Hard Assets
That isn’t to claim this is a risk-free asset class.
Here’s an illustration. Real estate investment trusts (REITs) and other REIT-like companies can be purchased to gain immediate exposure to a diverse portfolio of hard assets. Nonetheless:
- Retail real estate investment trusts (REITs) are subject to industry developments such as e-commerce. This is evident in lower-quality mall REITs such as CBL Properties (NYSE: CBL) and Washington Prime Group (WPG).
- Legal impediments apply to pipelines. Long-term delays are common in projects.
- During a recession, and especially during a global epidemic, airport revenues fall.
- Windmills’ value depreciates over time.
So, before you invest, talk to a Fiduciary Financial Advisor about how to build a selective and reasonably diversified portfolio of hard assets that fits your needs.
Hard Assets FAQs
What is the difference between a hard and soft asset?
Soft assets are those that can be distinguished from hard assets, such as plant and machinery, automobiles, and commercial property but have little or no resale value. Intangible assets are sometimes included with soft assets.
What's the most liquid asset?
Because it is cash, cash on hand is considered the most liquid sort of liquid asset.
What are some unique assets?
Real estate, closely owned businesses, mineral interests, loans and notes, life insurance, tangible assets, and collectibles are examples of unique assets. Fiduciaries typically accept these assets into trust accounts in order to accommodate a client’s whole portfolio of assets.