Human beings have five overt senses and we derive a level of comfort from engaging them. It is this very attribute of being human that can sway our investment choices too – often with abysmal results.
A favourite asset class amongst investors is property: you can see it and touch it; it can be bought with other people’s money and so the returns can be leveraged; it can be leased and so produce an income. It is an asset that is generally understood.
But property investment has some serious shortcomings. This is according to Morris Crookes of Foord Asset Management who says that for many people, a property investment is often a very substantial proportion of their overall portfolio. Consequently, such investors are often over-exposed not only to a single asset class, but to a single asset within that class.
“The price of a property is not readily determinable until a willing buyer agrees a price with a willing seller. Furthermore, a property is not something that can necessarily be turned into money immediately: the processes of transfer, conveyancing and registration mean that there is an inevitable delay between a transaction and the realisation of cash. Further still, the costs of buying, selling, maintaining and insuring property are not inconsequential.”
Tangible assets are not limited to property, of course. Investors have also invested in non-income yielding corporeal assets such art, Persian rugs and gold coins (which have enjoyed particular attention over recent times with the prodigious increase in the gold price).
“For the average investor, the issues of over-capitalisation, illiquidity, carrying costs (storage, maintenance and insurance) and lack of diversification remain. In many instances, a true understanding of the nature and behaviour of the tangible asset is also lacking. For example, does the average person know how Persian rug values have moved or can expect to move in the future?” asks Crookes.
It is for these reasons that investors must be encouraged to look beyond the obvious comfort of tangible, tactile assets.
This requires us to challenge our own beliefs and investor behaviour. “Without doubt, it is more difficult to appreciate something that we cannot see. It is more difficult to extrapolate those abstractions over the long term without the benefit of sensory cues. It is more difficult, but it is necessary in order to achieve an optimal investment outcome.”
“The issue is not that tangible assets are bad of themselves, and the rampant sale of properties and homes is not being encouraged,” says Crookes. “However, for the average investor, it is impossible to build a suitably diversified, liquid portfolio if too much focus and capital is placed on and in tangible assets. Cash is not king. But the inability to timeously convert an investment into cash at a value that is readily determinable can make for catastrophic investing.”
“In the childhood game of “rock, paper, scissors”, it is clear that no one attribute trumps all others. Each has its strength. In the same vein, a preoccupation with tangible assets amounts to a forfeit of other investment imperatives such as liquidity and diversification. These key characteristics of diversification and liquidity are inherent in an entirely intangible investment in a collective investment scheme (unit trust), particularly one that offers exposure to different asset classes and geographies,” concludes Crookes.