Diversification of different assets is an important aspect of effective financial portfolio management. These assets can represent resources of economic value owned or controlled by individuals, businesses, or entities.
Classified as a multifaceted asset, real estate includes land and structures built upon it. This physical asset is tangible meaning it offers security and stability in volatile markets.
The property values can increase over time due to factors like location, development works, and inflation leading to massive capital gains when it is sold. Moreover, rental properties can generate regular income through rent payments, providing a steady cash flow and building passive income.
Owing a stock of a certain company translates to a piece of ownership stake in the firm. As the company grows and earns more profits, its stock price typically increases, leading to capital appreciation for investors.
There are different types of stocks you can choose to invest your money in from growth stocks to dividend stocks. Some stocks pay dividends monthly and annually, which are a portion of the company's profits distributed to shareholders, this can be a source of regular cashflow if the company keeps performing well.
High-priced metals like gold, silver, and platinum have held a unique position in the world of wealth for centuries. These glittering adornments have limited supply due to their natural rarity which makes them a hedge against inflation.
When inflation erodes the purchasing power of currency, the value of precious metals may rise, as they maintain their intrinsic value over time. Gold is highly liquid and can be easily converted into cash.
A patent is an exclusive right granted for an invention, which means the patent owner has the sole right to make, use, sell, or import the invention for a limited period. It is an intangible asset and can be licensed to other companies for a fee.
Types of patents:
- Utility patents: They protect the functionality of a new machine, process, or composition of matter.
- Design patents: They protect the ornamental appearance of an article.
- Plant patents: They protect new and distinct varieties of plants.
Bonds are financial instruments that represent a loan made by an investor to a borrower which can be a government or corporation. They are considered a type of fixed-income security and are often regarded as a form of debt investment.
These bonds serve as a means for entities to raise capital by borrowing money from investors, and investors, in turn, earn periodic interest payments and the return of the principal amount at maturity. So as a part of financial planning plow money into one of these bonds, municipal bonds, government bonds, corporate bonds, and agency bonds.
Cryptocurrencies are a type of digital or virtual currency that uses cryptography for security and operates on decentralized networks, typically based on blockchain technology. In recent years, it has burst onto the financial landscape offering spectacular rises in value, attracting investors seeking high returns.
This digital asset operates on decentralized networks, potentially offering freedom from inflation and government intervention. Anyone with an internet connection can access and trade cryptocurrencies, bypassing traditional financial barriers.
Collectibles are tangible items that are valued for their rarity, uniqueness, historical significance, aesthetic appeal, or cultural importance. It can be a rare piece of art from a famous artist, historic coins, vintage cars, and any other unique or limited-edition items.
Many people collect items for their aesthetic or cultural significance. Moreover, collectibles can be passed down through generations, becoming treasured family heirlooms with sentimental value. Remember, a prized possession today could be worth less tomorrow.
Savings accounts are considered low-risk assets. A savings account is a type of deposit account offered by financial institutions, such as banks or credit unions. It is designed to provide a safe place for individuals to store money and earn interest on their balances.
One of the primary features of savings accounts is the accrual of interest on the deposited amount. While the interest rates on savings accounts are generally lower than those on riskier investments, they provide a safe and reliable way to earn a modest return on savings.
This unique class asset is a contract between you (the annuitant) and an insurance company. You make a single lump sum payment or a series of installments. In return, the insurance company guarantees you a steady income stream for a specific period or even your lifetime.
Types of Annuities:
- Immediate Annuities: Start paying out income right away, ideal investment for retirement income.
- Deferred Annuities: Grow tax-deferred until you start receiving payments, allowing for long-term accumulation.
- Fixed annuities: Provide a guaranteed, fixed rate of return over a specified period.
- Variable annuities: Allow the annuity owner to allocate their funds among different investment options, such as stocks or bonds.
Goodwill is the excess purchase price paid for a business over the fair market value of its identifiable assets like a building or inventory. Strong goodwill suggests a sustainable edge over competitors, leading to higher profitability and long-term value.
Calculating goodwill is not as straightforward as adding up the values of tangible assets. You can either use the Purchase price allocation method (subtracts the fair market value of all identifiable assets and liabilities) or the Discounted future cash flow method (estimates the future cash flow a company is expected to generate based on its intangible assets).
Licenses and Permits
Licenses and permits are mostly overlooked when considering assets, but they can be surprisingly valuable, granting rights and privileges that enable specific activities and generate economic benefits. These are legal documents granting permission to engage in a specific activity or use a particular asset.
Permits are official approvals authorizing specific actions or projects, often related to construction, environment, or safety. Examples include building permits, environmental permits, and health permits. Certain licenses and permits can signal trust and quality to consumers, boosting a business's reputation.
The intangible examples of assets are royalties. It is associated with musicians and their song rights and is a broader asset class encompassing various intellectual property and resource usage rights. They represent a stream of income earned by the owner of an asset for allowing another party to use it.
Books, music, movies, software, and even video games can generate royalties for their creators through sales, licensing, and usage fees. Moreover, oil, gas, minerals, and timber extracted from land often involve royalty payments to the owner of the resource or the government managing it.
Inventory refers to the raw materials, work-in-progress, and finished goods a company holds to sell them. It essentially represents the value of those items waiting to be converted into sales and ultimately, revenue.
Types of Inventory:
- Raw Materials: Purchased materials like timber, metals, or fabrics awaiting manufacturing processes.
- Work-in-Progress: Partly finished products that have not reached their final form.
- Finished Goods: Ready-to-sell products waiting to be shipped or placed on store shelves.
From bicycles to motorcycles and fancy cars, all vehicles offer both practical utility and potential financial value. More than just a personal luxury, it can generate regular cash flow if you use it for ride-sharing purposes or rent it on platforms like Turo.
It is a depreciating asset as, from the moment you drive off the lot, your car begins losing value due to factors like mileage, age, and condition. Classic cars, for example, can be appreciated if properly maintained and rare enough.
Cash and Cash Equivalents
Cash and cash equivalents are the most liquid assets a company or individual can possess. They represent resources readily available to cover short-term needs or take advantage of immediate opportunities. It can be your physical currency, coins, or checking/savings account balances.
Cash equivalents are short-term and highly liquid investments that are easily convertible to known amounts of cash and have a short maturity period, typically within three months. It includes financial instruments like Treasury bills, commercial paper, and certificates of deposit.
Peer-to-Peer (P2P) Loans
P2P loans can potentially offer higher returns than traditional investment options like savings accounts or CDs, averaging around 7-10% historically, though returns can vary greatly depending on borrower risk and platform fees. Examples of popular P2P lending platforms include Prosper, LendingClub, and Funding Circle.
Unlike mutual funds, you have some control over which borrowers you invest in, allowing you to choose loan types and risk profiles that align with your preferences.
Furniture assets encompass various movable items used to facilitate activities such as sitting, working, sleeping, or storage. This includes chairs, desks, tables, sofas, beds, cabinets, and other fixtures.
In accounting, furniture falls under the category of tangible assets, meaning it has a physical presence and can be readily identified. Like many physical assets, furniture is subject to wear and tear over time resulting in depreciation.
Trademarks are a type of intellectual property that can be considered a valuable asset for businesses. A trademark is a distinctive sign or symbol, such as a logo, name, phrase, or design, that identifies and distinguishes the goods or services of one business from those of others.
Its registration grants the owner exclusive rights to use the mark in connection with the specified goods or services. This exclusivity enhances the marketability of the brand and its associated products or services.
This category of asset types includes hardware, software, and networking components used for information processing and communication within an organization. They are used for facilitating various functions and processes and supporting the digital infrastructure of businesses.
These equipments represent a significant investment with a depreciating value over time. Proper accounting and depreciation schedules are crucial for managing this value.
Marketable securities are financial assets that can be easily bought and sold on a public exchange, such as a stock exchange or bond market. This high liquidity makes them attractive to investors who want to quickly convert their holdings into cash.
They offer the potential for capital appreciation through rising prices or income generation through dividends or interest payments. They can be easily bought and sold, providing quick access to cash when needed.
What Are Assets?
Assets are resources with economic value that an individual, company, or organization owns or controls, and they are classified into various categories based on their nature, characteristics, and purpose.
- Tangible Assets: Tangible assets are physical assets that have a definite monetary value and can be touched or felt. Examples: Real estate, vehicles, equipment, machinery, and inventory.
- Intangible Assets: Intangible assets lack physical substance but have economic value. They represent non-physical assets that contribute to a company's value and competitive position. Examples: Patents, trademarks, copyrights, goodwill, and intellectual property.
- Financial Assets: Financial assets are instruments that represent ownership or a claim to a financial benefit. These assets are typically liquid and can be traded in financial markets. Examples: Stocks, bonds, derivatives, and bank deposits.
- Investment Assets: Investment assets are holdings acquired with the expectation of generating income or appreciation in value over time. Examples: Stocks, bonds, real estate, mutual funds, and precious metals.
- Operating Assets: Operating assets are assets required for the day-to-day operations of a business. These assets are essential for generating revenue. Examples: Machinery, equipment, inventory, and accounts receivable.
- Non-operating Assets: Non-operating assets are assets that are not directly involved in the core business operations of a company. Examples: Surplus real estate, investments in other companies, and idle equipment.