The global economy has experienced an increase in inflationary pressures, fueled by factors such as expansive fiscal and monetary policies, supply chain disruptions, and labor shortages. These developments have led to growing concerns among investors, as inflation can have a negative impact on the purchasing power of money and erode investment returns.
In light of these concerns, it has become increasingly important for investors to diversify their portfolios to protect against inflation. By incorporating a variety of assets into their investment strategies, investors can mitigate the impact of inflation on their portfolios and enhance overall performance.
One approach to diversification involves including real assets in portfolio management. Find out how to create an inflation-resistant portfolio in this blog.
What are Real Assets?
Real assets are tangible and physical investments that have intrinsic value, such as real estate, commodities, infrastructure, and natural resources. Unlike financial assets, which derive their value from contractual claims, real assets have value that is directly tied to their physical properties. Due to their tangible nature, real assets can serve as a hedge against inflation and provide valuable diversification benefits.
Unique Characteristics of Real Assets
There are several unique characteristics of real assets that set them apart from traditional financial assets, such as stocks and bonds. These characteristics include a lower correlation with traditional investments, the potential for income generation, and a long-term investment horizon. Additionally, real assets often exhibit a positive correlation with inflation, meaning that their value may rise as inflation increases.
Benefits of Incorporating Real Assets in Portfolio Management
Protection Against Inflation
As mentioned earlier, real assets can provide protection against inflation. Their intrinsic value tends to increase as the general price level rises, which helps to preserve the purchasing power of an investor's portfolio. By including real assets in their investment strategy, investors can better shield their portfolios from the adverse effects of inflation.
Portfolio Diversification and Risk Reduction
Another benefit of incorporating real assets into a portfolio is the potential for diversification and risk reduction. Real assets typically exhibit low correlations with traditional financial assets, meaning that their returns do not move in tandem with those of stocks and bonds. Adding real assets to a portfolio help investors to reduce the overall risk and volatility of their investments, leading to more stable returns over time.
Enhanced Return Potential
Finally, real assets can offer the potential for enhanced returns, particularly during periods of rising inflation or economic growth. As the value of real assets tends to increase with inflation, investors may experience higher returns relative to traditional financial assets during such periods. This can lead to more attractive risk-adjusted returns over the long term.
Strategies for Selecting Real Assets in Portfolio Management
Assessing Individual Investment Goals and Risk Tolerance
Before incorporating real assets into a portfolio, it is crucial for investors to assess their individual investment goals and risk tolerance. Real assets come in various forms, each with its own set of risks and potential rewards. By carefully considering their investment objectives and risk appetite, investors can select the most appropriate real assets for their portfolios.
Evaluating Real Assets in the Context of the Overall Investment Strategy
Investors should also evaluate potential real asset investments in the context of their overall investment strategy. This involves considering how real assets may complement existing portfolio holdings and contribute to diversification benefits. Using portfolio management software or a portfolio management platform can be helpful in this process, as it allows investors to analyze the potential impact of real assets on their portfolio's risk and return profile.
Considering Liquidity and Transaction Costs
When selecting real assets, investors should be mindful of liquidity and transaction costs. Some real assets may be less liquid than traditional financial assets, making them more difficult to buy or sell quickly. Additionally, transaction costs for certain real assets, such as real estate or infrastructure, may be higher than those for stocks and bonds. It is essential for investors to weigh these factors when deciding which real assets to include in their portfolios.
Managing Real Assets for Inflation Protection
Regular Portfolio Rebalancing
To effectively manage real assets for inflation protection, investors should regularly rebalance their portfolios. This involves adjusting asset allocations to maintain the desired level of risk and return, as well as to account for changes in the value of real assets relative to other investments. Portfolio management platforms and asset management platforms can facilitate this process, making it easier for investors to monitor and adjust their holdings as needed.
Monitoring Real Asset Performance and Correlations With Traditional Investments
It is also important for investors to closely monitor the performance of their real assets and their correlations with traditional investments. This can help them to identify any changes in the inflation-hedging characteristics of their real assets, as well as to assess the effectiveness of their diversification strategy. An asset manager platform or a portfolio management tool can be instrumental in tracking these metrics and providing valuable insights.
Adjusting Asset Allocations in Response to Changing Market Conditions
Finally, investors should be prepared to adjust their asset allocations in response to changing market conditions. This may involve increasing or decreasing their exposure to real assets, depending on factors such as inflation expectations, economic growth, and the performance of traditional financial assets. Utilizing a portfolio management system can aid investors in making these adjustments and ensuring that their portfolios remain well-diversified and positioned for optimal performance.
Practical Tips for Portfolio Managers
Staying Informed About Macroeconomic Trends and Inflationary Pressures
In order to effectively manage real assets for inflation protection, portfolio managers should stay informed about macroeconomic trends and inflationary pressures. This can help them to anticipate potential changes in the inflation environment and to adjust their investment strategies accordingly. By staying abreast of the latest economic data and analysis, portfolio managers can make more informed decisions about their real asset allocations.
Leveraging Professional Expertise and Resources
Portfolio managers may also benefit from leveraging professional expertise and resources when managing real assets for inflation protection. This can include working with specialized investment managers, engaging in research and analysis, and utilizing portfolio management platforms to assist in the investment process. Portfolio managers can gain valuable insights and guidance on managing real assets effectively by tapping into these resources.
Emphasizing the Long-term Perspective in Portfolio Management
Lastly, it is essential for portfolio managers to maintain a long-term perspective when managing real assets for inflation protection. While real assets can provide valuable diversification benefits and inflation protection, their performance may not always be positive over shorter time horizons. By focusing on the long-term potential of real assets and maintaining a disciplined investment approach, portfolio managers can help to ensure that their clients' portfolios remain well-positioned to weather inflationary pressures and achieve their investment objectives.
Incorporating real assets into portfolio management can provide significant benefits, including protection against inflation, portfolio diversification, and enhanced return potential. Carefully selecting and managing real assets allow investors to help mitigate the impact of inflation on their portfolios and improve overall performance.
Given the growing concerns about inflation in the current financial climate, now is an ideal time for investors and portfolio managers to consider incorporating real assets into their investment strategies. By doing so, they can better position their portfolios to withstand inflationary pressures and achieve their long-term investment goals.