Artificial vs. Real Assets

What’s in your portfolio? Do you have real assets or are they artificial assets?

Artificial assets are investments that we buy because someone told us to buy them, or because they are the new exciting story in the newspaper or magazine. These assets do not fit well in overall and skew what should be a balanced portfolio.

Artificial assets are the new hot trends that tend to come up in conversations and on blogs that crave your attention. Every year there is a new trend or a hot new business sector in which investors want to buy. Not because it will help their portfolio over the long-term, but because it is exciting. These types of stocks (assets) are artificial. A real asset is the opposite. A real asset can be boring and is best when it sits in your portfolio over the long-term.

Real assets are traditionally big companies, small companies, international companies, emerging market companies, global real estate holdings and fixed income.

Here is another example of artificial versus real assets:

I had a client call me a couple of months ago saying that he wanted to buy two new stocks that he felt for sure would go up soon. After a conversation we determined that this was a form of entertainment. He was still interested in buying these artificial assets.

He told me that he had read an article about one of the companies (We will call Stock #A) that they were coming out with some new products and would be in high demand. Then he had also read a separate article about another company (We will call Stock #B) that was doing some research that was very interesting to him. This research was linked directly to his field of work and he felt confident that he was right.

With some disclosures and acceptance on his part, we put a little money into Stock #A and Stock #B. One month later we were visiting and we talked about his entertainment investments. It turned out that the first stock #A which had the new products - that he thought would greatly increase in value did the opposite. It decreased in value.

Then we talked about the other stock #B that he wanted to invest in only because he found their research to be interesting and thought that the people in the company were solid and intelligent people. Guess what? That stock went up.

So the stock he thought that would go up the most #A actually went down, and the one that he found interesting #B went up.

He was not buying stocks but buying entertainment from stock #A and #B that became an artificial asset. That is why it is important to understand if a stock in your portfolio is real or if it is just an artificial asset.