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Real Assets as a Reliable Option to Protect Capital From Inflation

At a time when the economy is going through moments of uncertainty, with symptoms such as sustained high prices, the need arises to protect ourselves; although that does not mean that we have to stop investing. In this order of ideas, real assets are considered a reliable option to protect capital from inflation.

Next, we will know what real assets are, how we can invest in them and what are their potential advantages to reduce or mitigate the decline in wealth and purchasing power.

Why protect capital from inflation?

 Inflation can be defined as a generalized increase in the prices of goods and services, over a sustained period of time and in a certain place. As a result, both the purchasing power and savings capacity of individuals may be affected, as they can no longer buy the same amount of goods with the same amount of money.

On the other hand, for those who have saved capital, this also usually means bad news, since the money is devalued. This is because the interest rates paid by banks or the investments made are not always higher than the accumulated inflation in that period.

In fact, there are times when a process known as hyperinflation takes place when there is such a lack of control in the economy and the rise in prices that it can exceed four digits (1000%). In other words, the costs are ten times higher. This has happened throughout history on several occasions.

And although we are currently far from that panorama, it is estimated that accumulated inflation in Latin America will reach at least 5.9%, by this year 2023, according to the international credit rating agency Fitch Rating.

Due to the above, keeping money in a savings account may not be very useful, since, as mentioned, that money will gradually lose its value. What is appropriate is to invest or look for shelters to protect capital from inflation. And among the different options we have the so-called real assets, which we will talk about below.

What are real assets?

Real assets are commonly referred to as physical assets that are tangible, i.e., they can be seen and touched, as opposed to other types of investments, such as cryptocurrencies or indices, which are intangible.

Within this group, there are different types of assets, although they all have in common the aforementioned characteristics:

·         Real Estate: land, houses, apartments, commercial premises, etc.

·         Precious metals and minerals: gold, silver, diamonds, emeralds, rubies…

·         Agricultural raw materials: soybeans, corn, wood and many more.

·         Infrastructure: it includes public services (water, electricity), as well as roads (tolls), airports, ports and others.

·         Energies: oil, gas, electricity.

Even a car, an antique object and works of art may eventually fall into this category or fulfill the desired function: to protect the capital from inflation.

How to invest in real assets?

The first and most obvious way to invest in a real asset is to buy it directly and become the owner of this property, whether it is an apartment, commercial premises or a few pieces of gold.

However, direct investment is not the only way, since it is also possible to have a participation, to call it in a way. This is something that for example can be done with real estate through real estate investment funds.

The same can be done, with other types of real assets, through index funds and with investing in the stock market, that is, buying shares. In fact, this is the only valid option in the case of utility companies.

Advantages and disadvantages of real assets

·         It is stated that real assets are an excellent tool for diversifying investments.

· One of its greatest advantages derives from the fact that they are considered uncorrelated assets.

* They are low-risk investments; although they are not totally exempt, not even in agricultural matters, since they can be affected by weather phenomena (hurricanes, droughts, among others).

* The return on real assets is variable, but they may have good long-term returns.

· They offer better levels of protection against inflation, compared to other types of investments (currencies, stocks).

· A disadvantage is that they may be less liquid investments; this is the case, for example, with real estate; although it is not the case with mutual fund shares or stocks.

A safe investment

Normally, we consider various possibilities, intending to reduce the potential consequences of widespread increases in the price of goods and services. But, when investing our capital, we can find a wide variety of options in the market, which leads us to wonder which one will be the best to choose.

And although real assets are presented as a fairly reliable alternative to protect capital from inflation, it is always necessary to carefully analyze each scenario, individually. This refers both to the economic context in which we find ourselves and to the asset we have chosen.

Among other things, we must make sure that we know the market well and also that we are choosing a reliable broker and certified by the authority of the country, to reduce or minimize, as far as possible, the risk of affecting our wealth. 

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