Betting on hard assets dangerous

The term “hard assets” covers a multitude of sins, everything from gold to oil to antiques to real estate. These are all tangible assets — they are things — as opposed to financial assets, such as stocks, bonds and cash investments, which are just pieces of paper that give the holder a narrowly defined monetary claim.

So why do you want to own hard assets? Some will tell you they are a good investment. The paranoid will tell you they are the only safe investment. The sophisticated will tell you they are a good way to diversify other investments. They may not be worth all this hype. Every so often, particular hard assets come into vogue and they can post huge short-term price gains. Impressionist paintings soar. Gold and silver take off. That leads many to assume that these hard assets are a good investment. They are not. Over the long haul, most hard assets will generate gains that roughly match the rise in inflation. Hard assets, however, won’t rise in lockstep with inflationary increases. If your timing is good and you are lucky enough to buy when gold is cheap and sell when they are pricey, you could do quite nicely. But in all likelihood, your gains will match the rise in consumer prices, and that’s it.

That, however, isn’t a bad attribute. How so? When inflation spikes up, most stocks and bonds get roughed up. Meanwhile, hard assets can perform handsomely. Because they are recognized as a store of value — they are real assets that should maintain their value in the face of rising consumer prices — investors flock to hard assets at times of inflationary bursts or general economic and political uncertainty. Indeed, neurotic investors, who believe the end of the world is nigh, are often big holders of hard assets, particularly precious metals like gold and silver. Those who are somewhat less skittish, however, tend to own hard assets as a way to diversify their stock-market investments. Just as bonds and cash are used to mute the risk of owning stocks, so hard assets are bought for the same reason. This is, I believe, the only legitimate investment use for hard assets. But it’s still fraught with difficulties. Many hard assets are expensive to own and troublesome to trade. Most generate rotten long-run returns. And those that don’t generate lousy returns tend to be lousy diversifiers for a stock portfolio. Lots of folks like to collect antiques, art, jewelry, comic books and stamps. If you question these people, many will tell you — with a straight face, no less — that the real reason they buy these hard assets is that they are a good investment.

In one sense, they can be a good investment, because they pay fat dividends to their owners. The dividend, however isn’t of the cash variety. Rather, it is the pleasure that folks get from having fine art on their walls or antique furniture gracing their living room. But what about actual monetary gain? That, I am afraid, is likely to be a disappointment. If the value of your comic books and your antique end table matches the pace of inflation, consider yourself lucky. Moreover, if you do try to cash in on this modest gain, you will find that selling hard assets is anything but easy. All of the potential buyers will want to inspect the item before they buy. Bids can vary enormously. Even the exact same antique end table, comic book or stamp can vary in price, depending upon the condition of the item. Because there is no central marketplace, you can’t be sure whether even the highest bid is a fair one. So maybe you decide to hang on to your hard assets. This, unfortunately, also isn’t cheap. If they are truly valuable, you may want to take out extra insurance or store them in a safe-deposit box. You may need to get them cleaned periodically or repaired. Such hard assets, in fact, turn out to be more of a millstone than a money-maker. You should buy jewelry and antiques if you like to collect them. But don’t expect to get rich.