An asset is something with useful, monetary intrinsic value. For example, owning a public company’s stock has monetary value, one’s good name or reputation has intrinsic value, a company name has value (what is the brand name “Coke” worth?) a shovel has useful value. Because this is a personal finance blog, I’ll narrow this discussion down to assets with monetary value, that is, something you can trade for dollars.
All monetary assets have value in one of three ways:
- Combination of income and appreciation.
For example, a stock like Apple has value because of its appreciation potential. A stock like Chevron derives most of its value from the income it produces (its dividend). On the other hand, high quality corporate bonds and government bonds have value because they produce income.
And then there are stocks that produce both income and have the potential for appreciation as well, for example, Microsoft.
Rental real estate is another monetary asset and it could be valuable as an appreciating asset or one that produces income or both.
Precious metals like gold, silver and platinum have appreciation value.
Collectibles like coins, antique jewelry, fine wine and classic baseball cards have appreciation value. A certificate of deposit has income value.
Depending on your investment goals, you want to own assets that help you reach your goals. For example, if your primary investment goal is to grow your portfolio, you want to own monetary assets with primarily appreciation potential; if you want to create income from your portfolio, you want income assets. And if you want some growth and some income, you want to own some of each type of asset or combination assets. The trick is holding the right proportion of assets consistent with your goals.
Here is the bottom line: there’s no such thing as a free lunch. If you want appreciation, you’re going to give up income; if you want income, you’ll have less appreciation potential. If you keep this one rule in mind, you’ll know what you own and why in your investment portfolio.