When to go for real assets

As you near retirement, increase exposure to real assets

Throughout your investing life, you take active investment decisions. One such decision is whether to invest more in financial assets or real assets.

Most of you have an inherent preference for real assets. But is investing in real assets always better? In this article, we discuss when during your investing life you should tilt your portfolio to real assets.

Portfolio portability

Financial assets such as stocks and bonds are typically part of your goal-based portfolio. For our discussion here, real asset refers to only real estate and gold. The proportion of real assets and financial assets in your investment portfolio depends on the characteristics of your human capital, the present value of all your future income.

Is your human capital volatile? That is, is a significant proportion of your income variable? Do you work in a cyclical industry subject to salary cuts during financial downturns? In such cases, you should not invest in real estate. Real estate requires large down payment and you have to borrow from the bank to buy the house. This could stress your cash flows when your income declines. Hence, your primary investment choice should be financial assets, especially bank deposits.

Then, there is the question of employment portability. Does your work require you to often go from one city to another?

If so, managing real assets may be cumbersome. Your investment portfolio should be preferably aligned with your human capital; high employment portability requires high portfolio portability.

This leads to a simple observation. As you approach retirement, you can increase exposure to real assets. Why? You are unlikely to change your employer or place of employment in the last five years of professional life. Importantly, real estate can create a synthetic pension, offering a steady stream of monthly rental income. It also often keeps pace with inflation.

What about gold? For retirees and those approaching retirement, gold serves two purposes.

One, it is a consumption asset that is given as gift to children and grandchildren.

And two, gold can be used as collateral to raise cash to meet unforeseen expenses.

Emotional satisfaction

If the only purpose of any investment is to generate cash for spending, the discussion about real assets and financial assets is meaningless. You simply have to invest in easy-to-manage assets that generate required cash flows.

Often, financial assets score over real assets because of better liquidity and portability.

So, why invest in real assets?

There are four reasons. One, both real estate and gold are touch-and-feel assets that give the emotional satisfaction of owning the assets.

Two, they are both consumption and investment assets. You can choose to earn rental income from your investment property and later live in that house if you no longer need the rental income. Likewise, you can sell physical gold and take profits or choose to convert it into ornaments.

Three, your previous generations invested in real assets to accumulate wealth. So you draw comfort from investing in real assets.

And four, lack of visible prices gives the illusion that real-estate investments are stable. So you are less fearful of investing in real assets.

But beware. Real assets require more efforts at preserving the investment. You have to maintain your property to fetch market rentals.

And physical gold has to be kept in bank lockers for safety. On the other hand, financial assets are housed in a simple-to-use demat account.

The upshot? You can invest in financial assets throughout your investing life. If have the compulsive urge to get exposed to real assets, consider investments closer to your retirement.

The writer is founder of Navera Consulting. Send queries to portfolioideas@thehindu.co.in

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