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What are Financial Assets?

What are Financial Assets?

An asset is anything that has economic value and can therefore be converted into money.

Unless you are homeless, you too will have assets. You could sell or rent your car or house if you really need it. This is why they are assets.

People, companies and governments all have assets. But instead of buying cars, what we do is to acquire assets that go up in value.

Because it is not very well seen that to buy cars or material goods for those of us who move our money for the long term.

Why?

Because it is considered a “bad asset”, and this logically implies that there are “good assets”.

What are these good assets?

Good Assets

We acquire them in the hope that they will increase in value in the future or even bring recurring money into our account. This is known as “cash flow”. The most popular examples:

  • Real estate
  • Shares in the stock market
  • And some more that we will see now

Bad Assets

When you buy them, they will more than likely go down in value over time.

  • A car
  • A smartphone
  • Netflix subscription (unless you only watch documentaries)
  • Any toy

In a company, an asset could generate income, or a company could benefit in some way from owning or using the asset.

How financial assets are classified

We can classify these assets into four main characteristics:

Volatility

We say that an asset is “volatile” when it has a lot of price variation as time goes by. The wider the “low to high” price range each day, weekly, monthly or long term, the more volatility it will have and vice versa.

Example: Bitcoin has a lot of volatility because if it is at 7,000 USD, it could be that after a few hours it has dropped 50% in value.

Risk

It doesn’t take a genius to understand that the higher the risk, the more likely we are to be left with nothing. So why do some investors/speculators put their money in high-risk assets? Well, because the potential return is also higher.

Example: Bitcoin is very volatile, therefore it has a high risk. Still, if my peace of mind allows me, I can pay 7,000 USD from the current price, and it has increased 50% in value from one day to the next. That is a net gain of 3,5000 USD. This means that although I have invested with a high risk (with the danger of losing a lot of money in a downturn), in this case, the volatility has been favourable to me. But logically the opposite can happen. It is the nature of risk.

Profitability

There are different types, but the one that interests us this time, is the financial one. It is the profit or benefit of my investment. It is the difference of my initial savings.

Example: if I invest 100 USD and that year my investment gives me 10 USD of profit, I will end up with 110 USD of my initial 100 USD. That is, I have had a return of 10%.

Liquidity

It means how quickly we can convert that investment into cash in our bank account. By common sense, there is nothing more liquid than cash (and water, which is also quite liquid…).

Example: a real estate property (house, apartment…) has little liquidity because if I want to convert it into cash, the selling process is a hassle: long and expensive. On the contrary, if I have money in some funds, I can sell them instantly and see the balance in my bank account at once.

The 8 types of financial assets

And now we are.

Once we have defined what characteristics you can have, let’s look at the types of financial assets that are used to invest in the long term.

The first and most obvious is:

Cash

Volatility-Risk – Low
Expected Return – 0% (or negative if you save and do not invest)
Liquidity- High

Yes, it is. Cash is also an asset and it is the most liquid asset there is. It is what we will use to buy the other assets directly.

When we say “cash” many people imagine a big wad of bills under the mattress.

In this category we also include virtual money that does not exist and we cannot touch.

Let’s say that if I have 1 million dollars in my bank account, ready to make a transfer and buy anything, that is also cash.

Whether in “imaginary” format or in cash, it is the most liquid form that exists.

We probably call it liquid because there is no easier way to spend it and it leaves our hands just like trying to hold water with an open hand.

What is more difficult for us to let go with an open hand are the precious materials.

Precious Metals

Volatility-Risk – Average
Expected Return – 2%.
Liquidity – Average

We already know about King Midas and his golden touch.

The fact is that there is no children’s story about a being who touched something with his finger and it turned into silver?

We can already imagine who is at the top of the pyramid of precious metals.

Even so, gold has no other function than money and decoration. Well, it does have a very small function. It does have a very small industrial use, but it is a pittance compared to other metals we use.

For example silver, not only has value for itself as a payment method, it also has an industrial functionality. We all use smartphones but not everyone knows that those circuits are made of silver.

Why is gold worth more? We don’t quite know, but we can begin to deduce that it’s because we’ve all decided it is.

It’s the law of supply and demand, after all. This is what we have decided over thousands of years of history, and it helps that gold is much more limited than silver.

Anyway, gold, silver or paladino, are types of financial assets that do not follow the same currents as other types of assets. It is for this reason that they earn

Cryptocurrencies

Volatility-Risk – High
Expected Return – +20%.
Liquidity – High

Let’s imagine Bitcoin as if it were gold, but electronic and without so many thousands of years of history. That is why its volatility is as high as the degree of uncertainty it conveys.

Since Bitcoin was introduced to the world, hundreds of cryptocurrencies have come out of nowhere trying to “reinvent the wheel”.

The fact is that since Bitcoin was created, nothing like it has ever been created. It fulfilled and continues to fulfill a monetary purpose for a need that, thanks to it, has already been covered.

Other cryptocurrencies will fulfill different needs, but the use of Bitcoin as money is indisputable and irrevocable by no other crypto.

Unlike paper money or the digits of dollars we see in our bank accounts that are being created “without pattern or stop”.

At the beginning of its creation it was considered a type of commodity, but in recent years Bitcoin has already earned the category of financial asset because it does not follow any of the currents of other assets. In addition to the fact that it is used for both speculation and investment. Come on. just like the other assets.

But let’s move on to another asset that we can touch: commodities.

Commodities

Volatility-Risk – High
Expected Return – 10%.
Liquidity – High

In fact, within commodities, we can include precious metals but I have decided to separate them because they fulfil a function that we already know: the refuge, and therefore, in different market behaviours they take a bullish or bearish trend independent of the rest of commodities.

What do they fall into this category? Well, we have an example:

  • Energy: natural gas, oil, coal…
  • Livestock and meat
  • Agriculture: soybeans, rice, coffee

With this list we can already see that the buying and selling of commodities is the first type of financial asset that began to be traded in ancient times.

Farmers who started in Mesopotamia did not trade possessions with dollars or gold, but with quantities of flour.

Real Estate

Volatility-Risk – Average
Expected Return – 5%.
Liquidity – Low

The star asset that is super trendy in some countries.

With huge amounts of empty homes, there are many people who have the idea that wealth is synonymous with owning more real estate than we need, and then renting it out.

The image of the developer is deified, but I think it must be due to the lack of financial literacy of many people. And since, at the end of the day, real estate is something we have in front of our noses, we can touch and also use, we end up worshipping it.

I did not want to start by talking negatively about it, because as an investment vehicle it is undoubtedly a very powerful asset, which takes its own category for the same reason as the others: its upward or downward flow is different from the rest of the investment assets.

Most working adults can have a mortgage that is automatically paid off with rent from a tenant.

I would never make this type of asset one of the most important in my investment portfolio. The reason? It is logical: the initial capital required.

Business

Volatility-Risk – High
Expected Profitability – +20%.
Liquidity – High

Let’s not forget that businesses are also an asset and to acquire them we have only two possible options:

Create a business from scratch
Buy an existing business

In the latter case, we’re not talking about buying a “piece of a business” as you do in the stock market. We are talking about buying a really small company and becoming part of the management team to be on the ground floor.

Fixed income (bonds or debt)

Volatility-Risk – Low
Expected return – 1%.
Liquidity – High

Government bonds and debt also have a cool name: fixed income.

What is it? The government wants to finance social projects, build roads, etc. But it doesn’t have that much cash in the coffers, in fact it realizes it needs to, so it takes out bonds.

Investors can invest in this debt, bonds or fixed income.

So by investing in this what I am doing is lending money in exchange for interest. There are 7-year bonds, 10-year bonds, 30-year bonds, and it’s not just governments that can put them out to investors, even companies can do it.

Even so, investing in a company is done in a better known way, the variable income.

Equities (stock market shares)

Volatility-Risk – High
Expected return – 10%.
Liquidity – High

Variable income is nothing more than the technical and cool name we use to call stock market shares.

Is there one type of asset that is better than another?

The answer is simple: no.

Depending on the economy we are living in at the moment, it will be better to have invested in one thing or another.

But of course, when it is time to have that specific asset, it is already late because we should have already invested. That is to say that in hyperinflation the best thing is gold, but when we are in front of a hyperinflation, the best time to buy gold was… Months or years ago.

As far as long-term investments are concerned, one of the things that is repeated the most is this: nobody can predict the market, but the second thing that is said the most is precisely the solution to this uncertainty:

Diversify, diversify, diversify