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Real assets versus financial assets

Why you should invest more in financial assets even if many Ugandans tend to favor real assets

COMMENT | HASSAN KITENDA | Money has been a pivotal factor for all human activity and the desire to make money has persisted from time immemorial. In today’s world we are given endless options to make money, often making it difficult to decide what is best. For example when it comes to investment, is it better to go with real assets or financial assets?

An asset is anything of monetary value that is owned by a person. Most assets are categorised as either financial or real assets. Financial assets are investments whose value is derived from a contractual claim of what they represent. Some of them include stocks, bonds and derivative instruments.

On the other hand real assets are tangible assets that have inherent value due to their physical attributes. Some of them are real estate, precious metals, commodities and equipment. Real assets are also known as physical assets. Both financial and real assets signify an economic resource that can be converted into cash.

It’s no secret that we, Ugandans, tend to have an affinity towards real assets with the most common being inform of real estate. Owning physical assets can certainly pay off. But to say it’s unequivocally better than investing in financial assets is shortsighted.

While real assets may have their benefits, financial assets certainly have lots to offer too. Most individuals I have interacted with ended up investing in an income property just because that’s what their parents did. Some of them put up rental units because they were not sure what else to do with their money and the income property narrative made sense. So why should you take the chance and invest in financial assets?

Investors should know that real assets are highly illiquid. This means that they are complex to be monetised at the time of need since they are usually more cumbersome to exchange. On the contrary financial assets can be easily converted into cash quickly at the time of need at close to the real value of the asset.

In addition to the benefit of highly being liquid, financial assets provide investors with a regular stream of income. Assets such as treasury bonds and certificates of deposits create a consistent cash flow to investors by paying steady dividend and interest payments to the investors. Furthermore, financial assets such as equities help preserve and build wealth as the assets invested multiply overtime through what is known as the magic of compounding.

It requires little capital to invest in financial assets yet the typical response I get when I tell people that investing in financial assets requires little capital is that of amusement. Most of them think that investing in financial assets is the domain of the superrich. But to the contrary, for a minimum of Shs100, 000, one can invest in a government security. Real assets on the other hand, for example, require substantially more money to set up as well as the cost of maintenance.

Almost every investor has heard the phrase “don’t put all your eggs in one basket”. It may sound cliche but financial assets offer diversification to the investor. Diversification needs to be of high priority when an investor is building their portfolio. It helps provide investors with better risk adjusted returns.

It should also be known that financial assets serve a major economic function of financing tangible assets. It becomes possible with the transfer of funds from those who have a surplus of it to where it is needed for such financing.

Financial assets are more transparent, the markets are controlled by a regulating body such as the Capital Markets Authority, which has designed the rules and regulations to guarantee smooth execution and transparency in operations. In terms of their valuation, the current value of financial assets can also be checked and tracked on the daily basis.

Discuss your asset allocation and financial goals with your financial advisor as each type of asset has its own potential rewards and risks. By owning a mix of different assets, you vastly diversify your portfolio. It is worth doing to minimise the risks you would assume by putting all of your money in a single type of asset.

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Hassan Kitenda is an equity and fixed income research analyst

email: hkitenda@outlook.com

twitter:kitendaahassan.

 

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