19. Assets

The world of financial markets knows many assets. They all have their pros and cons. As a long term investor, it makes sense to look at as many assets as possible in order to get a proper diversification as diversifying one's portfolio is a way to diminish risk.

19. Assets
Monetary graph
List of contents
Concentration versus Diversification

Concentration versus Diversification

Investing is often equated with gambling by the general public. Only who by any chance bets on the right horse, will be racking in the profits. Such lucky shots exist indeed. However, luck is not always the source of it all. Sometimes wealth is also the result of conviction, because capital was concentrated on a few investments - that turned out to be the right ones. Such an investment often means all or nothing. To a certain extent, investing according to diversification is the opposite. This involves spreading capital over enough uncorrelated assets to avoid cluster risks. The focus here is on long-term capital growth.

Asset Classes

Asset Classes

In investment theory, a distinction is made between different asset classes. The general usage of language differentiates between traditional and alternative investments. Traditional investments consist of shares and bonds. These include securities used to finance companies and governments. Usually, these two asset classes had been generally correlated in the opposite direction. In recent years, however, the correlation between the two forms of investment has increased more and more. This fact has brought alternative investments increasingly into focus. Diversification within the realm of traditional assets is becoming increasingly impossible, which is why the search for uncorrelated assets is becoming more and more intensive.

Shares

Shares

A necessary condition for the concept of shares was certainly the discovery of double-entry bookkeeping in the 14th century in the Italian city-states of Genoa and Venice. The first official shares were issued by the Dutch East India Company in 1604. The pooling of resources and the issuance of shares made it possible to launch capital-intensive, high-risk projects such as merchant ships - a privilege previously denied only to governments or extremely wealthy families. By their very nature, shares are securitized securities on equity. As an investor, you participate in the success or failure of a company. As a stockholder, you therefore always have a business risk. If this pays off, the shareholder benefits from dividend payments. Today, shares are valued according to established models. There are many key figures of share valuation. Important to note: The value of a share is not determined by past prices, but always by the expectations of future earnings and prices.

Bonds

Bonds

Historically, the concept of bonds can likely be reached back to what can be called rentes, i.e. fixed-income securities. As debt securities, they represent securitized securities on debt capital. Issuers of such securities are states or companies. In contrast to shares, capital can be raised without having to provide collateral. There is also no right to vote associated with bonds contrary to shares. Borrowing capital through bonds usually involves fewer conditions that the borrower has to meet vis-a-vis the creditor. Usually, bonds throw off interest payments, which accrue over a certain period of time. At the end of a term, the principal amount has to be settled and paid back or a bond has needs to be rolled over, meaning that a new bond is issued to pay for the old one. Because a bond structure is a relationship between borrower and lender, the latter is exposed to credit risk. There is also an interest rate risk. Important to know: Bond price and interest rate act in the inverse. If the bond price falls, the interest rate rises and vice versa. Bonds are evaluated according to a rating matrix. Bonds are not traded in currency, but in percent.

Government Bonds

Government Bonds

Government bonds are considered to be "safe" investments - the interest yield of the US government bond is generally regarded as the "risk-free yield" within the investment world. This is because governments, above all the US government, are considered the most potent debtors around since they have a monopoly on the use of force. "Backing" government bonds are taxes and these are generally considered to be almost guaranteed in our modern world. Benjamin Franklin already knew this when he said that only two things are certain in life: death and tax. That is why government bonds today form the safety buffer of every traditional portfolio. However, government bonds are only "guaranteed" in nominal terms, so their supposed security depends directly on the stability of the currency they are issued in. Today, they hardly yield any interest or even have a negative return - especially since central banks are among the largest, price-insensitive buyers of them. The latter also testifies to their distorted nature.

Corporate Bonds

Corporate Bonds

This type of bond has higher premiums than a government bond because companies do not have any coercive tax power. Historically, a company's default is higher, which is why buyers want to be compensated for this risk. In addition, most corporate bonds - with the exception of FAAMG bonds - do not come close to the market liquidity of most government bonds, which is reflected in them having a price premium. Just like government bonds, the various corporate bonds are now distorted because they are purchased by central banks. The Bank of Japan and the ECB are pioneers in this respect. For example, the European Central Bank has bought the bonds of LVMH, a luxury goods company owned by what is officially the third richest man in the world.

A World Turned Upside Down

A World Turned Upside Down

Stocks and bonds are to a certain extent without alternatives and therefore still an integral part of any classic portfolio. There are still some great stocks and there are still some options in bonds. However, a growing basic problem is that the two historically uncorrelated asset classes are becoming increasingly correlated. Moreover, equities and bonds seem to be increasingly swapping roles. Today, investors are looking for high-dividend equities as defensive securities and stable anchor assets, while speculation is taking place with government bonds. After all, the latter display continuously lower yields, which is why their prices are constantly rising and can thus be sold on to the next bidder at a profit.

Alternative Assets

Alternative Assets

The category of alternative assets includes investment forms that go beyond shares, bonds, and money market products. Usually, real estate, precious metals, but also investments in collector's items, private equity or private debt are meant. For a few years cryptoassets, above all Bitcoin, have increasingly made it into the limelight of financial experts and investors. The aim of adding such alternative assets to a portfolio is to reduce overall correlation. Alternative investments often take up only a few percentage points of the total portfolio.

Real Estate

Real Estate

Real estate is probably the most important alternative investment. Since housing is a basic need, the demand for real estate should never fall below a basic threshold. Real estate also generates a rental yield, which makes it attractive in the eyes of many investors. Last but not least, real estate is considered to an asset similar to gold, as it is tied to a certain natural scarcity. The scarcity argument applies even more to the land the houses are built on. Mark Twain is said to have said: "Buy Land — They’re Not Making Any More". Certainly, real estate also carries certain risks. As the name suggests, the investment is rather immobile. As tied-up capital, real estate is a particularly popular target for taxes and other levies. Also, market liquidity is often considerably lower compared to other investments.

Precious Metals

Precious Metals

Precious metals have always been regarded as the true alternative investment, especially since they have repeatedly proven to be a protection against inflation. They have a long history and historically, gold can also be seen as the ultimate money chosen by the market. In its physical form, gold is no one's obligation or liability and therefore carries no counterparty risk. This is different in the case of "paper gold", where a certificate is issued for a contractually agreed amount of gold. Silver exists in the shadow of gold. While gold has always been the money of the big man, silver has always been the money of the little man. Silver is more widely used in industry, while there is a greater monetary demand for gold. Although investors still hold silver, there are some who consider silver to be demonetized. Other precious metals are platinum or palladium. However, due to the much lower stock-to-flow ratio, these are less suitable for long-term investment.

Bitcoin

Bitcoin

As an absolutely scarce digital good, bitcoin is considered the embodiment of digital gold. Thus bitcoin is also seen as a complement to gold, an asset with similar characteristics (as it is no obligation to anyone either and resides outside the traditional financial system as well). However, because bitcoin is digital, the cryptoasset is said to have advantages that gold does not have. There are many other cryptoassets besides bitcoin. Whether "crypto" will develop into a separate, standalone asset class is not yet clear. It is probable that, if that should be the case, it will only count a few dozen cryptoassets. Security tokens, which today are also still known as "crypto", actually belong to the asset class of shares and will probably also be subsumed under this class once they have become established.

Collectibles

Collectibles

Collectibles include art goods such as paintings, but also luxury goods such as vintage cars, watches, diamonds, or whiskeys. As investment objects, these have become increasingly important in recent decades. This is probably due to the increasingly expansive monetary policies of the central banks, which have flooded the markets with liquidity, forcing investors in search of returns to look more and more for exotic investment alternatives. In the course of blockchain development, it is speculated that the tokenization of collectibles of all kinds will further increase their attractiveness. The same expectation applies to the tokenization of real estate.

Private Equity and Private Debt

Private Equity and Private Debt

Private equity and private debt is an alternative form of private financing outside of public markets. Investors make direct investments in companies. These investments come primarily from institutional investors and accredited investors who can provide larger sums of money over a longer period of time. In most cases, these investments often require significant holding periods. The investments (equity) and loans (debt) come from specialized institutions and companies that focus on specific segments within the economy. The private investment market continues to grow as more and more sources of capital become available for this type of financing.