Real assets vs. financial assets (comparison + examples)

Real assets vs. financial assets (comparison + examples)

When you start knocking on the door of needing to define real assets vs. financial assets, you’re getting into the “nerdom” of financial planning – and I mean that in a very good way. (As a co-founder of Sound Financial Strategies Group and the investments professor at Mississippi College, it’s safe to assume I’m a bit of a financial planning nerd, myself.)

If you’re reading this, you likely have a goal in front of you that is challenging you to think about financial planning through a different lens. 

For instance, you might have had a liquidity event; you sold your company or your house, or perhaps a rental property. Or, perhaps you’ve raised investable assets and you’re wondering, “Do I want to invest in a rental property, or do I want to invest in stocks and bonds? Do I potentially want to invest in a business?”

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You may also be thinking about your financial goals more broadly in a way that more closely resembles financial freedom — having to work vs. wanting to work — rather than more traditional, time-bound goals such as retirement. 

Whatever the case may be, learning what real assets are vs. financial assets is essential to helping you understand what risks you may be taking on with your choices. I want to say that again — this kind of education will not help you alleviate your risks, but it will help you understand them. Think of risk as both a feature and a bug, when it comes to real and financial assets.

In our society, you have ample opportunity to build a powerful portfolio of assets, but it starts with education. So, my goal here today is to empower you with that necessary education (definitions, context, and so on) about real and financial assets. They are your investing building blocks. 

What are real assets? (a definition)

The pure academic definition of real assets is land, buildings, equipment, and knowledge that can be used to produce goods and services. I would also add businesses as real assets, as they produce goods, services, and income.

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In a practical sense, a real asset is something that is most often productive. But what do I mean when I say “productive?” 

Let’s say you’re a homeowner. I could ask you, “What does your house do for you?” I asked that question of one of the members of our marketing team recently, and she quipped in reply, “Well, it doesn’t do my taxes!”

Ha! I conceded she wasn’t wrong, but then countered: “Did you sleep comfortably in your home last night? Do you have a roof over your head and four walls around you? Do you feel safe and protected from the rain and snow?” In that way her house is productive. It is a tangible asset that does something for her.

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What are financial assets? (a definition)

In contrast to real assets, financial assets are claims on real assets or income generated by real assets. For example, a stock is a claim on the ownership of a company, a land title is an ownership claim of land, a REIT (real estate investment trust) owns titles or claims to portions of real estate, and so on. 

Financial assets allow us to “securitize” — an admittedly very wonky word that’s prevalent in our industry — a hard asset into a security that can be traded back and forth much more easily.

By this definition, financial assets are much more liquid with a lower barrier to entry, which is an advantage. Meaning, I can go out today and buy Tesla stock (a financial asset) with no issue. But I can’t go to Elon Musk and have him sell me Tesla, as a whole. I can’t buy Tesla’s equipment, intellectual property, buildings, or anything else that would be considered a real asset.

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Not only are Tesla’s real assets not for sale, none of us could likely afford to buy them. There’s even a slim chance that even the federal government probably couldn’t print enough money to afford some of those real assets. OK, maybe they could, but you get my point.

Again, that’s the advantage of financial assets (Tesla stock) vs. real assets (Tesla intellectual property). They are easier to acquire and, depending on the financial asset, relatively easy to get out of. 

Assets, your net worth, and your legacy

I always tell people, you make a living and you grow your net worth applying your skills and work ethic in your career. This is where you grow your income that you then, in turn, invest and save into financial assets. You don’t make a living trading and growing financial assets; (for most people) that’s not your work. That’s not what’s going to grow your real wealth — unless it is a part of your skillset and career.  

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As you grow more financially independent (e.g., you grow into retirement or financial freedom), you can liquidate more of your real assets — not all of them, mind you — and move them into financial assets, as they are easier to manage. Heck, if you want to leave your family a meaningful financial legacy, do them a big favor and have everything liquidated at your passing and leave them nothing but financial assets. 

To be clear, this is not a blanket, one-size-fits-all recommendation. Certainly, there are types of income producing real assets that you may want to pass onto your family. If you’re a member of the Tesla family, and you actually do own Tesla, you may not want to do that; you will want to keep Tesla. The larger point here is that financial assets are easier to pass down and easier to manage.

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This is sometimes hard to do, because we can fall in love with our real assets — family homes that have years (even decades) of memories housed within them, or businesses built lovingly by family members. 

This may sound cold, but remember assets of any kind do not love you back. Furthermore, someone else will own everything you own (or it will be in a junkyard) 50 years from now, guaranteed. That’s why you must be careful not to invest your life into things that are intangible. Just manage your assets.

Knowing these definitions matters

As I said at the start of this, financial education, like knowing the difference between real assets vs. financial assets, is very important. Knowing what they are, as well as their benefits and challenges, can help you make smart decisions. 

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Keep in mind, however, that there is risk inherent to any investments you make, no matter how informed you may be. For example, understanding how to borrow money to buy financial assets is its own can of worms. Still, education and financial literacy when it comes to assets can help you minimize risk rather than creating new risk, where you could be creating opportunity. 

More simply, when it comes to financial topics, knowledge is power.