There are many interpretations of what an asset or an investment can be. Distinguishing between the two may help you focus on what you need in your portfolio and how to keep them balanced to meet your financial goals.
We may say ‘I invested in a good haircut’, but is that really an investment? Sure, it may help you with that first impression or win you the sale. It also helps with self-esteem which contributes to confidence in your dealings. But, in a few weeks, its value is gone.
In a financial sense, aninvestmenthas the potential for short or long term growth or profit.Anassethas the ability to generate cash and potentially grow in value. Both also carry inherent risks that could cause you to lose some or all of your money.
The purchase of a home is generally considered a good investment because it has the potential to grow in value while simultaneously providing shelter for you and your family. Loan applications want you to list your home as an asset, because to them it is. Should you default, they can take your home, sell it and turn it into cash. To you though, it is really a liability until you sell it, hopefully for a profit. While you own it, you have to pay the mortgage, insure it for the bank, heat it, cool it, and take care of it, consuming your time and money. Meanwhile the home provides no monthly cash flow for you. It does provide a place to live and if held for thirty years will probably pay off handsomely, so it is a good asset.
With the exception of a rare collectible, a car is not an investment either. It does not pay you a dividend or go up in value. It is simply a necessary tool that gets you and your stuff from point A to point B. This too goes on the loan application as an asset for the same reason stated above, it can be repossessed and sold.
Stocks and bonds are investments, but unlike a home, cannot be insured, so the risk is all yours. Those that generate dividends could be considered assets, but they too could go to zero. The point here is that assets range from great to poor, and most of us buy poor assets.
True assets have the ability to always carry value and generate cash, such as a business that can be sold. For example, a hair salon will generate ongoing cash and can be sold to someone with the proper hair care skills, added value comes from a loyal clientele. Same for a dental or law office. However, someone with a unique talent such as a sports hero, actor or landscape artist, can make a good living with their business, they can’t sell their talent to a new owner.
Intellectual property created by authors in the form of songs, books, articles or inventions that generate royalties are great investments and will most likely return more than the original investment.
Real Estate and farmland that generate rent, retail stores, oil wells, guaranteed annuities, are all assets that generate cash flow and the physical property or rights can be sold. Consider adding and building true assets to your portfolio for long term growth and cash flow.