Investing in physical assets vis-a-vis financial assets

Centenary Bank: Invest Based on What You Want to Achieve Not what is Trending

As an avenue of spreading risks effectively and securing predictable income streams, Centenary Bank customers have been encouraged to invest more in physical assets.

This advice was delivered during a virtual Investment Club engagement session organized by the bank, under the theme “A Professional Perspective on Investing in Physical Assets versus Financial Assets”

According to a policy paper on boosting investments during and after the COVID-19 period by Uganda Investment Authority, USD 1,184 million was projected to be registered for the 2020/21 financial year at a 28 percent anticipated growth.

Some of the fixed assets

In his keynote delivery to the attendees of the session, Aeko Ongodia, a Chartered Financial Analyst from XENO Investment Management, mentioned that, “People should view investment as an activity you undertake today to obtain future cash flows, without regard to the nature of the investment and investment period.

Ongodia added; “before making any investment, one should understand the role that the assets they are investing in play in a person’s investment portfolio. Asset typically play three fundamental roles: meeting short-term liquidity needs, ensuring security of capital invested, and providing long-term growth. It is not impossible to find assets with all three attributes, but also it can be difficult. However, an asset should be able to have at least one of the stated attributes that one should put into consideration before investing”.

Much as it is becoming increasingly popular to invest in physical assets, maintaining funds in liquid financial assets can result in greater preservation of capital.

Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.

Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry. Stocks, bonds, cash, certificate of deposit, and bank deposits are some examples of financial assets.  

It’s important to note that much as financial assets can easily turn into cash, can be used as collateral when borrowing, and have the ability to appreciate in value, financial assets do not have a set monetary value until they are converted into cash, especially in the case of stocks where their value and price fluctuate.

Businesses, as well as individuals can hold financial assets and in the case of an investment or asset management company, the financial assets include the money in the portfolios firm handles for clients, called assets under management.

However, these assets can also present drawbacks. For example, some highly liquid financial assets such as fixed deposits, treasury bills and bonds do not appreciate over time.

On the other hand, some illiquid physical assets such as real estate may be hard to convert to cash in the short term without significant loss in value, they also have the potential to appreciate significantly over the long term.

The investment decision should not be dictated by the assets.

Rather, it should be the other way round, the investment decision should be dictated by what you would like to achieve, your investment period (short term versus long term), investment objective (capital preservation versus growth), and personal circumstances (i.e. whether you will occasionally need to liquidate your investment assets to meet short term liquidity needs).

A person or investment club that establishes a diversified investment portfolio that contains the appropriate mix of both financial and physical assets playing different roles ranging from liquidity, security, and growth will perform better over the long term than one that only has one type of asset.

A professional investment manager or advisor can help you undertake the necessary research to construct an appropriate investment portfolio for your circumstances.

XENO is one such and has been helping individuals to plan, save, and invest for their financial goals.

During the discussion, customers were encouraged to plan, define their goals, and save before conducting any investment.

“Proper planning is a crucial step, and people should decide to diversify their assets so as to reduce or spread the risk of their portfolio.” Ongodia cautioned.

Centenary bank pledged to continue sharing with its customers more quality professional guidance to help their clients make the right financial decisions to achieve the future they deserve.

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