Physical asset investment involves directly owning tangible assets with the expectation of value appreciation or stability. Physical assets, ranging from real estate and precious metals to art and collectibles, have different advantages and disadvantages compared to financial products like stocks and bonds.
This article introduces the basics of physical asset investment, its benefits and drawbacks, and the types of representative physical assets. If you’re considering physical asset investment, please use this as a reference.
What is Physical Asset Investment?
Physical asset investment is an investment method that involves purchasing and holding actual physical assets rather than financial products like stocks, bonds, or investment trusts. These “physical assets” are diverse and include the following categories:
- Real estate
- Precious metals (gold and silver)
- Art
- Antique coins
- Wine
Physical asset investment is gaining attention as part of risk diversification because asset values tend to fluctuate over time and are less susceptible to market trends. Below, we’ll explain in detail the differences between physical assets and financial investments, and why physical asset investment has been attracting attention in recent years.
Differences Between Physical Assets and Financial Assets
Physical assets and financial assets are often compared as investment targets, but they have significantly different characteristics, risks, and revenue structures. Let’s look at the differences in detail below.
Physical Assets
Physical assets are tangible, real assets. Specifically, they include the following:
| Real estate | Refers to assets that can be used as physical space, such as land and buildings. |
| Precious metals | Metals such as gold, silver, and platinum. Traded as decorative items or investment bullion. |
| Art and antiques | Paintings, sculptures, antique art objects, etc. Works by specific artists or from certain eras can have high value. |
| Collectibles | Items with high rarity value, such as antique coins, stamps, vintage wines, classic cars, etc. |
The characteristic of physical assets is that they have a physical form and are less directly affected by market fluctuations. They are also considered suitable for preserving asset value due to their resistance to inflation.
On the other hand, physical assets incur storage costs and maintenance expenses. For example, real estate requires property taxes and management fees, while art pieces need secure storage space and temperature/humidity control.
Furthermore, it’s important to understand that they have low liquidity and are difficult to quickly convert to cash.
Financial Assets
Financial assets are assets based on intangible certificates or rights, such as cash itself, stocks, bonds, and investment trusts. Main financial assets include the following:
| Stocks | Held as proof of investment in a company, allowing for dividends and capital gains. |
| Bonds | Securities for earning interest income on loans to countries or companies. |
| Investment trusts | Aim for risk diversification and profit expansion by depositing funds into assets managed by professionals. |
The advantage of financial assets is their high liquidity and relatively easy trading. Due to developed securities markets, online trading is possible, offering the benefit of quickly converting assets to cash.
However, financial assets are susceptible to market trends, with the risk of significant fluctuations in asset value due to changes in stock prices or interest rates. They are also more susceptible to currency value depreciation due to inflation.
Why is Physical Asset Investment Attracting Attention?
The background for the recent attention to physical asset investment includes concerns about financial market instability and inflation. Here are the main reasons why physical asset investment is attracting attention:
- Market instability and risk diversification
- Strong resistance to inflation
- Low-interest environment and diversification of investment opportunities
- Digitalization and improvement of investment environment
When financial markets become volatile, the value of financial assets like stocks and bonds fluctuates greatly. Especially when market volatility continues due to external factors such as economic recessions caused by the Lehman shock or pandemics, investors tend to move funds from high-risk assets to safer assets.
Against this background, investment in physical assets is attracting attention as a means of risk diversification. For example, real estate and precious metals are considered less susceptible to stock price fluctuations and tend to maintain stable value over the long term.
Also, collectibles such as art and wine may increase in price due to increased rarity or popularity. These physical assets have unique appeals not found in financial assets, making them attractive investment targets for investors interested in specific fields.
In recent years, the digitalization of physical asset investment has progressed, making it possible to trade online. This has made it easier for general investors to purchase precious metals or participate in art auctions online, which is a significant factor in the growing attention to physical asset investment.
Benefits and Drawbacks of Physical Asset Investment
Physical asset investment has unique benefits and drawbacks not found in financial assets. It’s important to understand both the benefits, such as being a hedge against inflation and asset stability, as well as the drawbacks, including liquidity and storage costs.
Let’s explore each of these in detail below.
Benefit: Assets Strong Against Inflation
One of the major benefits of physical asset investment is its strength against inflation. Inflation decreases the value of currency, so financial assets like cash and bonds risk losing real value due to inflation.
However, physical assets tend to increase in value along with price increases, offering an expected effect as an inflation hedge. Therefore, in addition to representative physical assets like precious metals and real estate, collectibles such as paintings, sculptures, wine, and antique coins are also attracting attention as physical assets that maintain value during inflation.
These items may maintain or increase in price even during inflation due to their rarity, artistic value, or increasing demand. Especially works by famous artists or vintage items tend to fetch high prices in the market, making it easier to preserve asset value over long periods.
In this way, physical asset investment is often used as a means to protect assets from inflation, offering various benefits including risk hedging for investors.
Benefit: Stability of Physical Assets and Risk Management
Another benefit of physical assets is their usefulness from the perspective of stability and risk management. Unlike financial assets, physical assets involve owning actual tangible items, so their value is less directly affected by economic conditions or market fluctuations.
Financial assets such as stocks, bonds, and investment trusts are sensitive to financial market trends and can experience significant value fluctuations. They have a high risk of price volatility in short periods due to various external factors such as economic crises, interest rate changes, and political instability.
On the other hand, physical assets are relatively resistant to market fluctuations and less likely to be affected by short-term market movements. Especially rare art pieces, precious metals, and real estate tend to maintain their value over long periods.
Therefore, physical assets are attractive options for investors as they are strong against market fluctuations and tend to retain long-term value.
Drawback: Unique Risks Such as Liquidity and Storage Costs
While physical investment has many benefits, there are also drawbacks not found in financial assets. Particular attention should be paid to the following points regarding risks unique to physical assets:
- Low liquidity
- Incurrence of storage and maintenance costs
- Difficulty in price evaluation
One of the biggest drawbacks of physical assets is their low liquidity. Financial assets like stocks and bonds can be bought and sold in a short time through exchanges, making them easy to convert to cash.
However, physical assets often take time to sell, and it can be difficult to find buyers. Also, because physical assets have a physical form, storage and maintenance costs occur.
For example, with art pieces and collectibles, proper storage conditions (temperature and humidity control, security) are required as the preservation condition directly affects the asset value. Thus, while physical investment has benefits such as resistance to price increases, it’s important to understand that there are also drawbacks such as low liquidity and storage costs.
Types of Representative Physical Investments
There are various types of physical investments, each with its own characteristics, risks, and profitability. Here, we introduce four representative types of physical investments:
- Real estate
- Precious metals
- Art
- Collections
Real Estate Investment
Real estate investment is particularly common among physical investments and is an investment method that can expect long-term stability and high profitability. The main purpose is to purchase physical assets such as land and buildings and gain profits through rental or sale.
One of the benefits of real estate investment is the expectation of stable income. By renting out housing, office buildings, or commercial facilities, you can earn monthly rental income.
Also, from a long-term perspective, real estate values often gradually increase, with a high possibility of capital gains at the time of sale. Especially properties in good locations in urban areas or land expected to be developed have high expected returns.
However, real estate investment also has various risks. First, the initial investment amount is large. Purchasing land or buildings requires a large amount of funds, and if taking out a loan, repayment continues over a long period, making careful financial planning essential.
Furthermore, in the case of rental properties, there is a vacancy risk where income stops if there are no tenants. As it is also affected by regional economic conditions and real estate market fluctuations, proper property selection and risk management are required.
Precious Metals (Gold, Silver, Platinum)
Investment in precious metals is an investment method of purchasing and holding rare metals such as gold, silver, and platinum. Used as a means of value preservation since ancient times, especially gold is still popular among investors as a “safe asset.”
Precious metals tend to have stable prices in the long term, regardless of economic conditions or market trends, due to high global demand and limited supply. Also, investment in precious metals can be done in various ways.
In addition to holding physical assets in the form of bullion or coins, indirect investment through gold ETFs (Exchange Traded Funds) is also possible. In the case of physical possession, there is the advantage of being able to feel the existence of the asset by actually storing the gold at hand.
On the other hand, when holding gold or silver bullion, a safe or specialized storage place is necessary, and security measures must also be considered. Furthermore, although the price fluctuation of precious metals is not as large as financial investments, it is still affected by market supply and demand balance and exchange rates, so it is necessary to understand the risk of price fluctuations.
Art and Collections
Investment in art and collections is an investment method that involves purchasing items with rarity or artistic value such as crafts, paintings, sculptures, antique furniture, wine, vintage watches, stamps, and coins, expecting their value to increase.
In recent years, investment in digital art pieces such as NFT (Non-Fungible Token) art has also been attracting attention. Regardless of whether it’s physical or digital, the market value of art can surge when demand increases, making it one of the investment methods that can expect large returns.
The appeal of collection investment lies not only in its value as an asset but also in the enjoyment of its beauty and as a hobby. Many investors purchase not only as assets but also from the joy of ownership, driven by their passion for art and antiques.
On the other hand, investment in art and collections comes with unique risks. First, because value assessment is subjective, it can be difficult to purchase or sell at an appropriate price. Expert appraisal may be necessary, and fees for buying, selling, and storage may occur.
Also, the preservation condition of art pieces greatly affects their value, so proper storage with temperature and humidity control is necessary. Furthermore, the art market has lower liquidity compared to other markets, with the risk of not being able to quickly convert to cash. Therefore, a long-term investment perspective and specialized knowledge are required.
Thus, there are various types of physical investments, each with different risks and returns. When choosing an investment target, it’s important to select the optimal asset according to your investment purpose and risk tolerance.
Points to Consider When Starting Physical Investment
While physical investment has unique benefits, it also has risks. Therefore, careful preparation and a long-term perspective are necessary when starting investment. Here, we explain important points to keep in mind when starting physical investment.
Confirm Risks and Market Trends Before Investing
When starting physical investment, it’s important to first thoroughly confirm the risks and market trends of the investment target. Physical assets have unique risks different from financial assets, and without understanding these, proper risk management is impossible.
For example, in the case of real estate, it’s necessary to research the area’s development plans, economic conditions, and demand in the rental market. For precious metals, you should check factors that affect prices such as international situations, central banks’ gold holding trends, and conditions in producing countries.
For art and collections, confirming elements that affect the value of the target object, such as artist evaluations and transaction records in auction markets, will be the first step towards investment.
Criteria for Choosing Physical Assets
As introduced in this article, there are various types of physical assets, each with different characteristics and risks. When choosing an investment target, it’s important to carefully select based on your investment purpose and financial situation.
Also, storage and security measures are important elements when physically possessing and storing assets. Precious metals and art pieces require proper storage, and costs may be incurred for storage locations and security measures. Therefore, it’s desirable to comprehensively consider including storage costs and choose assets that can be maintained long-term.
However, in recent years, investment targets such as NFT (Non-Fungible Token) art have emerged, which are physical investments but digitalized, reducing risks related to storage and security measures.
A Long-term Perspective Unaffected by Market Fluctuations is Important
A major characteristic of physical investment is that it tends to retain value over the long term. However, to maximize this characteristic, a long-term perspective unaffected by short-term market fluctuations is necessary.
Therefore, keep the following points in mind when starting physical investment:
- Don’t be swayed by short-term price fluctuations
- Position as part of your asset portfolio
- Investment strategy that makes time your ally
Physical assets may experience short-term price fluctuations due to market trends and external factors. For example, real estate prices are easily affected by economic conditions and interest rate trends, and art and collections may also fluctuate in price due to market trends.
However, focusing on such short-term fluctuations may lead to losses due to unnecessary trading. Physical investment inherently has the advantage of holding assets that maintain or increase in value over the long term, so it’s important to continue holding with a long-term perspective without being swayed by short-term price fluctuations.
Therefore, when starting physical investment, in addition to market trend research, risk understanding, and appropriate asset selection, having a long-term perspective is essential. By keeping these points in mind, you can effectively utilize physical investment and steadily increase your assets.
Conclusion: Physical Investment Requires a Long-term Perspective and Proper Risk Understanding
Physical investment is an investment method that aims to maintain and increase the value of tangible assets such as real estate, precious metals, and art pieces. Unlike financial assets, physical assets have unique benefits, but they also come with specific risks.
Therefore, to succeed in physical investment, it’s important to research market trends, understand risks, and hold assets with a long-term perspective. While keeping these points in mind, choose physical assets that suit you and use them for future asset building.
Physical investment offers a unique opportunity to diversify your investment portfolio and potentially protect against inflation. However, it’s crucial to approach this type of investment with careful consideration and thorough research.
Remember that physical assets often require more hands-on management than financial assets. This includes considerations for storage, insurance, maintenance, and potentially complex processes for buying and selling. The illiquid nature of many physical assets means that you should be prepared to hold onto these investments for extended periods.
Moreover, the value of physical assets can be subjective and influenced by factors such as trends, rarity, and condition. This makes it essential to develop expertise in your chosen area of investment or to seek advice from professionals.
Despite these challenges, physical investment can be rewarding both financially and personally. Many investors find satisfaction in owning tangible assets, whether it’s a piece of real estate, a collection of rare coins, or a beautiful work of art. These assets can provide a sense of security and personal enjoyment that goes beyond their monetary value.
As with any investment strategy, it’s wise to diversify your portfolio. Physical investments can play a valuable role alongside more traditional financial investments, helping to create a well-rounded and resilient investment approach.
Ultimately, successful physical investment requires patience, knowledge, and a clear understanding of your investment goals. By taking the time to educate yourself and carefully considering your options, you can make informed decisions that align with your financial objectives and personal interests.
Whether you’re just starting to explore physical investments or looking to expand your existing portfolio, remember that the key to success lies in thorough research, careful selection, and a long-term perspective. With these principles in mind, physical investment can be a valuable tool in your overall wealth-building strategy.
