Real Assets vs. Financial Assets: Complete Guide

Real Assets vs. Financial Assets: What’s the Difference?

Real assets are physical, tangible investments like real estate and commodities, while financial assets are intangible contracts like stocks and bonds. Real assets derive value from their physical properties, while financial assets get value from contractual claims or ownership rights.

Real assets versus financial assets represent the fundamental classification system in portfolio construction. Real assets provide inflation protection and diversification benefits, while financial assets offer liquidity and efficient market access.

What Are Real Assets?

Real assets are tangible assets with intrinsic value derived from their physical properties and substance. Real assets provide utility independent of financial market conditions and offer direct exposure to economic fundamentals. 

Key characteristics of real assets: 

• Physical existence and tangible properties 
• Intrinsic value from substance or utility 
• Direct exposure to supply-demand dynamics 
• Inflation-hedging potential through pricing power

What Are the Main Types of Real Assets?

Real assets fall into four primary categories: real estate, infrastructure, natural resources, and productive land. Each type offers different risk-return profiles and portfolio benefits. 

• Real Estate: Commercial, residential, and industrial properties generate income through rents and appreciate through property value increases. Real estate investment trusts (REITs) provide liquid indirect access to real estate markets.
• Infrastructure: Transportation networks, utilities, and energy systems offer predictable income and stable cash flows that appeal to institutional investors.
• Natural Resources and Commodities: Energy resources, precious metals, and agricultural products (corn, wheat, grain) provide direct exposure. These assets serve as inflation protection and portfolio diversifiers.
• Productive Land: Timberland and farmland generate income through harvests while the underlying land increases in value. Endowments and sovereign wealth funds increasingly favor these allocations.

The complexity of investing in real assets requires professional management, thorough client suitability assessments, specialized due diligence, and longer investment horizons.

What Are Financial Assets?

Financial assets are essentially paper or digital claims to value, such as money held in a bank account or stocks and bonds. Financial assets don’t have physical qualities you can use or consume. Instead, financial assets are valuable because they represent an agreement or ownership. 

For example, a stock certificate or brokerage account entry represents part ownership of a company, and a bond note represents someone’s promise to repay you with interest. Many financial assets entitle investors to cash flows, such as dividends on stocks or interest payments on bonds.

Key characteristics of financial assets:

• Intangible contracts or ownership claims
• Value from future cash flows or repayment promises
• Greater liquidity (the ability to quickly convert financial assets into cash) through established markets like stock exchanges.

What Are the Main Types of Financial Assets?

Financial assets include four primary categories: equity securities, fixed income securities, cash equivalents, and investment funds. Each category serves different portfolio objectives and risk tolerances.

• Cash and Cash Equivalents: Money market instruments and short-term securities provide liquidity and capital preservation for flexible investing or cash needs.
• Equity Securities: Common and preferred stocks represent a fractional ownership claim on a company and its future earnings.
• Fixed Income Securities: Bonds, notes, and other debt instruments that represent a contractual right to receive interest payments and repayment of the principal amount. 
• Derivatives and Financial Contracts: Derivatives are financial assets in the form of contracts whose value is linked to another asset or index. Examples include stock options, futures contracts on commodities, and swaps.

How Are Real Assets and Financial Assets Different?

Real assets and financial assets differ in three key ways: how their value is determined, liquidity characteristics, and risk profiles. Real assets require specialized valuation and offer lower liquidity, while financial assets provide transparent pricing and immediate market access.

Real Assets vs Financial Assets Comparison

What Is Inflation Hedging?

Inflation hedging is a strategy investors and companies use to protect the value of their money or assets from being eroded by rising prices. When inflation increases, the purchasing power of cash declines. An inflation hedge aims to offset or outpace that decline.

Real assets serve as effective inflation hedges because their values typically adjust with rising price levels. Fixed-rate financial assets often lose purchasing power during inflationary periods, making allocations to real assets essential for long-term portfolio protection. 

Limited Supply and High Demand

Many real assets are scarce. Land, oil, and precious metals can’t be printed or manufactured at will, so when inflation picks up, the demand for these assets often pushes their prices higher. This scarcity makes them effective stores of value.

Income Streams That Adjust With Inflation

Some real assets also generate income that can adjust upward with inflation. For example:

• Real estate: Property owners can raise rents when inflation drives up costs.
• Infrastructure assets: Utilities, toll roads, or pipelines often have pricing tied to inflation or cost-pass-through mechanisms.
• Commodities and natural resources (like oil and agricultural products) tend to increase in price as they are key inputs to the broader economy.

Practical Example of an Inflation Hedge

Imagine you own a 20-unit apartment building. Each unit currently rents for $1,000 per month.
The total annual rental income is $240,000 (20 × $1,000 × 12). Operating costs (maintenance, property taxes, utilities, staff, etc.) are $100,000 per year for a net operating income (NOI) of $140,000.

Impact of 5% Inflation

1. Rents adjust upward.
   • In many markets, landlords can increase rent annually. With 5% inflation, you might raise rents by roughly the same amount to keep up with higher costs.
   • New rent per unit = $1,050 per month.
   • Total annual rental income = $252,000.
2. Operating costs also rise.
   • Inflation pushes up expenses (repairs, staff wages, property taxes). Let’s assume they increase by 5% as well.
   • New operating costs = $105,000.
3. Net operating income keeps pace.
   • New NOI = $252,000 – $105,000 = $147,000.
   • This is a 5% increase in NOI, matching inflation.
4. Property value rises
   • Real estate is typically valued based on income (capitalization rate method). If the market cap rate is 7%, the property value is:
     • Before inflation: $140,000 ÷ 0.07 = $2 million.
     • After inflation: $147,000 ÷ 0.07 = $2.1 million.
   • The property appreciates 5%, in line with inflation.

In this scenario:

• Your income stream (rents) adjusted upward, protecting your purchasing power.
• Your property value increased by the same percentage as inflation.
• While costs also rose, your ability to raise rents kept your real return intact.

This is how real estate acts as an inflation hedge. Net income and the underlying asset value generally move in step with inflation, preventing erosion of investor wealth.

What Is Portfolio Diversification?

Portfolio diversification is an investment strategy where you spread your money across a variety of assets instead of putting it all into one type of investment. The goal is to reduce risk while aiming for steady returns over time.

Real assets can play an important role in portfolio diversification because they behave differently from traditional financial assets like stocks and bonds. 

Suppose a portfolio has 70% stocks and 30% bonds. It might perform well in stable, low-inflation periods but become vulnerable if inflation rises and bond prices fall. By adding 10–15% real estate or commodities, the portfolio holds assets that may appreciate during inflationary periods, reducing overall volatility.

Key Takeaway: Real Assets vs. Financial Assets

Real assets are tangible items like real estate, commodities, and infrastructure, whose value comes from their physical properties and role in the economy. Financial assets, such as stocks and bonds, are intangible and their value depends on the performance of the issuing entity, such as a company’s financial performance.

Real assets hold value on their own, while financial assets rely on the success and stability of whoever issued them.

Frequently Asked Questions (FAQs)

What is the main difference between real assets and financial assets?

Real assets are tangible investments like property and commodities whose physical properties hold value. Financial assets are contracts like stocks and bonds that derive value from claims on other entities.

Why do institutional investors include real assets in portfolios?

Real assets provide inflation protection, portfolio diversification through low correlation with traditional securities, and steady income streams that help investors meet long-term obligations.

Are real assets riskier than financial assets?

Real assets have different risk profiles because this asset class is less liquid and potentially more complex. However, real assets can provide better inflation protection and lower correlation with market volatility than financial assets.

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Additional Resources

Asset Valuation

Intrinsic Value vs. Market Value

Types of Assets

See all Capital Markets resources

See all Valuation resources