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5 risks of investing in physical assets 🔍

In this short article, we are going to summarise a handful of the main risks involved with physical assets. Please note, this is not a comprehensive guide, there may be other risks associated and you should do your own research. Let's get started.

Definition of a Physical Asset

What gives physical assets value?

To understand the risks with physical assets, it's worth knowing what gives the asset value. While a number of things can give value to a physical asset, the main one is almost always supply and demand. Generally speaking, most physical assets are in a finite amount.

Take a specific work of art by Banksy. There will only be one of its kind, meaning supply is far lower than demand, so the price of the asset will appreciate and be relatively high. If, for example, Banksy did the same work of art 1,000 times, the increased supply means this change in the supply and demand relationship would likely reduce the arts price and value. This relationship between supply and demand drives the value of most assets, particularly in physical assets when there’s simply high demand and not that many to go around.

5 risks of investing in physical assets

If supply exceeds demand: Generally speaking, high-value physical asset are usually in limited supply. Take a luxury watch where there are only hundreds ever made. Much of the value comes from its scarcity . If the watch supplier decides to increase supply to tens of thousands, then the asset would fall in value.

Not all are equal: When an investor buys a share in Tesla, they can guarantee its price will be identical to another Tesla share. When it comes to physical assets, this may not be the case in some instances. Authenticity and quality are just some of the factors that can drive this variance, particularly in the context of things like wine, watches, art and collectibles.

Capital risk: As with all financial investments, investing in physical assets involves real risk. Prices of any physical asset can go down as well as up and you could end up with less than you started with.

Liquidity: This essentially means, how readily and easily an asset can be bought and sold. Not all physical assets share the same level of liquidity, and generally speaking, they are much less liquid than financial assets, such as stocks. This means it can be hard to sell holdings quickly. This isn’t physical asset exclusive however, all asset classes and types have different levels of liquidity and it is an important factor to consider before you invest.

Fees and commissions: Given the expertise to source, curate and offer access to physical assets, costs can vary greatly between providers and the platforms you use to access them. Many fees are baked into the purchase price of a given asset, so make sure to choose a provider who is upfront about any costs, fees or commissions before investing.

What's the bottom line?

Physical assets can be an effective, alternative way to build diversity into your investment portfolio. They are an increasingly popular choice for investors looking to invest in tangible assets with low correlation to the financial markets. It’s important however to consider the risks, characteristics and liquidity of any physical asset before investing real money. Reputable alternative asset investment platforms can help mitigate some, but not all risk, by collaborating with industry experts, sourcing and validating assets and providing detailed descriptions, professional analyses, and realistic assessments of value and yield for each asset. Like with all investing, it is important to do your own research and know the risks before investing in physical assets.

Want to learn more?

Interested in investing but don’t know exactly where to start? Try the free Pluto app. Learn investing basics, and practise in a risk free environment with no real money. Find us on the Apple App Store.

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