Income and Growth; Real and Traditional

I know, I know. Having a real asset is great. Who wouldn't want to see their investment with their own two eyes? A big plot of land with multiple houses or a farm that has flora and fauna everywhere.

These properties generate income from rentals to the sale of farm products. Awesome, right?!

Tangible/Real assets are great to have in your portfolio. But having ONLY real assets can be problematic.

A number of people love real assets. "Land and property prices always rise!", they exclaim. They are not wrong. Land bought 100 years ago is very valuable now.

But, their mindset is stuck on that "rise in value".

But here is the kicker: that value is *locked* in the real asset. If you wanted to access that value, you have to sell that asset (or take a loan against it) and then use the money for what you want.

Disadvantages of real assets are:

1. Illiquidity. It takes time and can be quite costly to turn them into cash.

2. Indivisibility. You cannot sell pieces of them.

Let's bring some bundles of joy into the equation.

If you had children, and you want them to go to university abroad, and school fees cost $400,000 for their entire varsity experience, and you had real assets worth that, it would mean selling some to pay for the school fees. That would suck, wouldn't it? Because you may still want to keep that real asset as it may have more value in the future.

So then how do you get the money to pay for their school fees?

1. You can get a loan against your real asset.

2. Invest in something more liquid.

The first option works. But some people don't like debt. Because it means being committed to a $400,000 loan for x amount of years.

The second option works too because it means no debt. But it means you have to prepare for it years before they start university.

By "liquid" I mean something you can convert to cash quickly, easily, and is not too costly. Savings are liquid, but their returns are quite low. Financial markets, on the other hand, can yield returns that could get you to take them to said good university.

By financial markets, we are talking about those traditional assets - stocks and bonds. They can help individuals with situations that need large cash amounts without the need for touching real assets. They are kind of the middle ground between bank savings and your real assets. Real assets are too illiquid, bank savings have low returns. So traditional assets give you a sweet spot.

So when the child starts university, instead of selling a hectare of your farm to pay for their first-year university fee, which might take some time, you can tap into your portfolio of traditional assets, sell a huge amount, and use the cash to pay their school fees, all the while having your real asset still give you income (which could be their allowance while they are abroad).

And this brings us to the third way to get money to cover their fees:

Years before they start university, instead of consuming all the income from your real assets, invest a percentage of it and have it grow. This means your real asset is giving you income that you will use for capital growth.

The school fees was a simple example. Other life situations may happen: medical bills, weddings, downpayment for houses, etc.

And of course, there might be tax implications.

With debt, there is no tax. But by selling a chunk of your traditional assets, you trigger a capital gains tax. So it is up to you to do an analysis and decide which is more worth it. (Or have a trusted financial advisor do it for you).

The goal is to have both income and capital growth. The goal is to have both real assets and traditional assets in your portfolio.