Two Fundamental Asset Categories
Every investment ultimately belongs to one of two broad categories. Financial assets are paper claims — a share is a claim on a company's future earnings, a bond is a claim on a borrower's future cash flows. Their value is derived from an underlying promise or contractual right. Real assets are physical things — land, buildings, commodities, infrastructure, timber, gold. Their value is intrinsic to their physical existence and utility, independent of any issuer's promise to pay.
This distinction shapes how each asset class behaves, what risks it is exposed to, and how it responds to inflation.
Physical Assets and Their Characteristics
Real assets include real estate (residential and commercial property), commodities (oil, agricultural products, metals), infrastructure (toll roads, airports, utilities), and precious metals (gold, silver). What they share is that they produce economic value through their physical use — a warehouse stores goods, farmland grows crops, an oil field produces energy.
Because real assets are priced in nominal currency terms but their underlying utility exists in the physical world, they tend to preserve value during inflationary periods better than financial assets. When the price of goods rises, the value of the physical inputs — land, energy, metals — often rises with it. Bonds, by contrast, pay a fixed nominal coupon that loses real value as inflation accelerates.
This inflation-hedging characteristic makes real assets a meaningful component of a well-diversified portfolio, particularly in environments of rising or uncertain inflation.
Long-Run Return Evidence: Ibbotson and Siegel
Research by Roger Ibbotson and Jeremy Siegel has provided the most comprehensive long-run data on how different asset classes have performed across extended historical periods.
Ibbotson's work, most famously compiled in the Stocks, Bonds, Bills and Inflation (SBBI) yearbook series beginning in 1977, tracked US asset class returns from 1926 onwards. His data showed that while equities led all asset classes over the long run, real assets such as real estate and commodities provided meaningful real returns and, critically, low correlation with financial assets — reducing portfolio volatility when combined.
Jeremy Siegel, in his 1994 book Stocks for the Long Run, extended the analysis to show that real estate and commodities, while delivering lower nominal returns than equities, served as effective stores of real wealth over centuries, holding their purchasing power in ways that cash and bonds could not during inflationary episodes.
Store of Value Characteristics
A store of value is an asset that maintains its purchasing power over time. Gold is the most iconic example — its use as a monetary store of value spans thousands of years. Unlike a bond, gold has no coupon; unlike a share, it generates no earnings. Its value rests entirely on scarcity and its role as a universal medium of exchange and wealth preservation.
The store of value argument is most powerful during periods of currency debasement or high inflation. Gold performed strongly in the 1970s inflationary decade and again in the 2000s as investors sought alternatives to paper assets during periods of central bank expansion. However, over very long periods dominated by economic growth and stability, gold tends to underperform equities significantly — its value as a store of value is most apparent at the extremes.
Real Assets in a Portfolio
Real assets are not simply a hedge against inflation — they also provide portfolio diversification because their returns are driven by different factors than stocks and bonds. A commodity super-cycle can produce strong returns in real assets even when equity markets are struggling. Infrastructure assets often generate stable, contracted cash flows with inflation linkage built in.
The practical implication is that a portfolio concentrated entirely in financial assets — stocks and bonds — has hidden exposure to the assumptions underlying those paper claims: stable monetary policy, functioning credit markets, and manageable inflation. Adding a real asset allocation challenges those assumptions and reduces concentration risk.