Why Wall Street Is Lagging Behind Real Assets & How You Can Benefit

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Key Takeaways

• Inflation can eat away at the real value of Wall Street investments. Real assets tend to be a better hedge against rising prices.
• Intrinsic value and lower volatility make real assets enticing to those looking for long-term financial stability and a hedge against recessions.
• Because of high fees and complex structures, Wall Street can eat away at net returns. Cost compare and look for transparent, low-fee options.
• Portfolios diversified with real assets can reduce correlation risk and be more resilient to market dislocations.
• Our knowledge of macroeconomic forces like monetary policy and global supply chain disruptions informs better investment decisions across shifting environments.
• If you do your due diligence and invest directly in real assets, you can enjoy more control, higher possible returns, and alignment with long-term objectives.

That’s because of market swings, stock price shifts and the ways financial tools can restrict growth.

Real assets such as land, real estate and commodities provide consistent worth and can more effectively combat inflation.

Stock markets can demonstrate early victories but are subject to short-term fads and sentiment.

To put these notions in context, it’s useful to understand the divide between financial markets and the value of tangible assets.

Fundamental Reasons

There are some basic reasons behind why Wall Street underperforms real assets. They consist of topics like how inflation nibbles at returns, the real value of your assets, investor psychology, how fees erode profits, and how leverage shifts risk. All contribute to long-term outcomes.

1. Inflation Erosion

Inflation eats away at the purchasing power of cash-denominated investments and equities, which makes real returns less than they appear. When prices go up, your dollars don’t go as far, particularly for purchases not related to materials or real estate.

Real assets such as farmland, real estate, and infrastructure tend to appreciate with or outperform inflation, thereby maintaining value. You’re right, as history proves Wall Street has a hard time beating inflation for long stretches of time, with most funds unable to remain ahead, particularly during periods of elevated inflation.

Some investors hedge against this by employing real assets or inflation-linked bonds, but these aren’t likely to be included in most equity-oriented portfolios.

2. Intrinsic Value

The concept of intrinsic value is straightforward: it is what something is actually worth, not just what a market will pay for it today. Above all, real assets generally have tangible, quantifiable value, such as land or real estate that can be leveraged or leased.

Stocks, by contrast, depend on future profits, which are more difficult to estimate and can fluctuate enormously with market changes. In many cases, this makes real assets more steady. When stock prices fall, the intrinsic value of a real asset tends to remain, providing investors comfort.

Over the long run, though, assets with solid intrinsic value deliver more reliable performance.

3. Market Psychology

Humans aren’t always rational actors in markets. Fear of loss and hope of short-term gains guide decisions, often to their detriment, as Prospect Theory demonstrates. Most investors chase stocks as they rise and panic in downswings, which results in damaging whipsaws and impaired returns.

To make things worse, there’s short-term thinking and massive cash churn in and out of funds. More than $1 trillion withdrew from actively managed equity funds in one year alone. Emotional moves, as with the world’s stock markets, can result in underperformance, but real assets command a more steady hand.

4. Fee Structures

Charges, even tiny ones, gnaw at returns. Wall Street funds charge management fees, trading costs, and often hidden fees. As a result, they accumulate, and yet the majority of actively managed funds still don’t outpace their benchmarks.

More than half fall short annually. In contrast, direct investment in real assets or low-fee funds keeps fees low, leaving more for investors. Awareness of all costs is the key to better outcomes.

5. Leverage Dynamics

Taking on debt to amplify returns, called leverage, can come back to bite. When markets decline, losses can compound quickly. Wall Street gets more leverage than real asset investors.

Real assets tend to be less debt-reliant, hence less risky in difficult times. Less leverage means more stable returns and less risk of catastrophic losses.

Macroeconomic Forces

Wall Street’s relative underperformance to real assets boils down to some macroeconomic forces. These encompass changes in monetary policy, global supply chain upheaval, and an evolving regulatory environment. All of these factors influence what drives markets and where capital flows and returns are made, particularly across asset classes.

Monetary Policy

Central banks set the pace by shifting interest rates and employing quantitative easing. Low rates, for example, tend to propel investors toward stocks and bonds, but they can inflate asset prices and depress yields. Between 2008 and 2017, businesses distributed all of their profits, which is essentially the reverse of reinvestment and is in part fueled by easy money.

Quantitative easing after the 2008 crisis made debt cheaper, but it also pushed up valuations on Wall Street securities, making genuine returns scarcer. When interest rates increase, for example, bonds and stocks may lose appeal while real assets such as property or commodities can retain value or appreciate.

Net non-residential fixed investment as a share of GDP fell by 40 percent from 4.1 percent in the 1970s and 80s to only 2.5 percent in the last decade, reflecting a secular shift in capital away from tangible assets. Information, with a singular profile and an outsized share of market cap in the early 1970s, grew in a way traditional real assets could not. This growth brought volatility, as the early 2000s tech bubble taught us.

To cope with these shifts, investors diversify into real assets, hedge with inflation-linked securities, or rebalance portfolios as central banks shift rates or liquidity. These tactics defend gains when policy pivots.

Global Supply Chains

Supply chain disruptions wrecked havoc on Wall Street assets, particularly those connected to global trade or manufacturing. Real assets, such as farmland or infrastructure, can provide a cushion when shipping lanes or materials are congested. The worldwide boom of 2003 to 2007 relied on frictionless supply chains, but the 2008 to 2009 recession revealed the dangers when those connections snap.

Local investments sometimes fare better during worldwide shocks. Real assets based in local demand or resources can avoid some dangers that strike stocks or bonds tied to global trade. Supply chain resilience now matters too as investors seek assets that can withstand shocks, whether from trade spats or hurricanes.

In fact, during periods of supply chain stress, real assets could be a winner. Scarcity can push up prices for access to land, minerals, or infrastructure.

Regulatory Impact

Regulation determines both what investors may invest in and the manner in which they invest. Wall Street is heavily regulated, which restricts the upside or adds expense. Compliance nibbles at profits, and rule changes can render certain strategies impossible.

For instance, financial activities’ share of GDP increased from 2.5% in 1970 to 4.8% in 2017, and so did complexity and oversight. Regulatory change can open new doors. As rules change, new markets or asset classes occasionally crop up, enabling investors to discover unexploited returns.

The expansion of securities, commodity contracts, and investments from only 0.2% to 1.6% of GDP demonstrates how regulation and innovation are a package deal. Investors adjust by remaining nimble, following rule changes, and occasionally moving capital to lightly regulated areas, such as some forms of real assets.

Inherent Differences

Wall Street investments and real assets tap different, often non-overlapping, reservoirs of risk, reward, and investor background. Knowing what distinguishes them provides international investors a more defined direction when constructing portfolios that align with their objectives, risk appetite, and investment horizons.

Volatility

Wall Street assets such as stocks and bonds have a tendency to exhibit volatile price fluctuations. For decades, equity markets responded swiftly to news, policy shifts, and market sentiment. For instance, giant daily swings of 2% and more are standard fare during market turmoil.

Real assets like property, farmland, or infrastructure change in value more slowly. Their prices reflect local supply, demand, and tough economic utility, not just market enthusiasm. To handle variability, some investors turn to diversification, hedging, or long-term holding.

These may assist, but erratic fluctuations still have a psychological impact. Others panic and sell low, or chase rallies and buy high, eating into their returns. Stable real assets come to the rescue. They tend to give you consistent revenue and serve as ballast, particularly when financial markets are turbulent.

Liquidity

Liquidity defines investment decisions and portfolio construction. For a practical checklist, consider these factors:

• Speed of Sale: How quickly can you sell? Wall Street assets can change hands in seconds, but real assets might require months or more to sell.
• Market Depth: Is there always a buyer? Stock exchanges have deep pools; real assets depend on many fewer participants.
• Price Impact: Will large trades move the market? Thinly traded real assets can experience large price swings from a single trade.
• Costs: What are the fees to buy or sell? Stocks have low commissions. Real assets have appraisals, legal fees, and taxes.

Most Wall Street investments are liquid, letting investors buy or sell at will. Tangible assets require patience and this very patience can protect owners from panic selling and short-term taxes. Short term gains in stocks can be taxed at up to 37 percent, but real assets can benefit from capital gains tax rates that are much lower.

Correlation

Conventional Wall Street stocks typically shift with the business cycle. In downdrafts, the stocks tend to fall together, diminishing diversification benefits. Real assets such as commercial property, infrastructure, or commodities tend to be less correlated to financial markets.

They can hold value or even increase when stocks stumble, offering a cushion in diversified portfolios. Spreading out real assets reduces the risk of everything falling at the same time. This equilibrium is crucial during crises, when correlations between stocks and bonds can soar.

Portfolio managers use real assets to smooth returns and avoid sharp drops. Knowing these distinctions assists investors in crafting the appropriate blend, harmonizing development, solidity, and enduring wealth.

The Value Disconnect

Wall Street frequently trends independently of the real economy or the assets that define everyday life. Stock indexes can make new highs and unemployment claims can go up, evidencing a value disconnect between the financial markets and Main Street.

Monetary policy and asset prices have a hand, but those impacts take time to make their way into the wider economy, with lags of months or even years. This disconnect is critical for investors balancing the true value of investments versus physical assets.

Abstract vs. Tangible

Abstract financial instruments—such as stocks, bonds, or derivatives—are claims to future income or liability, not tangible property. Their worth can move quickly, fueled by fads, emotion, or regulatory shifts.

Physical assets like real estate, infrastructure, and commodities provide immediate utility and obvious value. For example, farmland grows crops, real estate shelters, and energy resources fuel cities. These can appear more stable, particularly in downturns.

When markets slide, folks still might need a roof over their heads or staples, so that demand for these assets tends to hold up better than shares that simply represent anticipated future earnings.

Physical ownership provides psychological solace. They can see it, touch it, and use what they own — unlike stocks or funds. This sense of security can help curb some of the panic during market busts and booms.

Physical assets have proven to maintain value through market shocks.

Short-Termism

Near-sightedness informs much of Wall Street craft. Fund managers are under immediate pressure to demonstrate fast returns since their record is measured on a quarterly basis.

This emphasis can encourage risky gambles or shortcuts to reach goals rather than creating sustainable value. When investors pursue quick returns, they can miss out on steady, slow-growing investments that thrive in the long term.

Shifting out to the long-term perspective helps. Using strategies that align investment horizons with real-world needs, like owning infrastructure or property, maintains an emphasis on value generation.

Long-term investing links returns to real economic output, amortizing the shocks from short-term noise and syncing incentives with general economic growth.

Agency Conflicts

Agency conflict occurs when investors’ money managers serve themselves, not the investor. This may imply trading for fees or risking to increase short-term returns, even when it damages long-term outcomes.

These frictions can bog down output and corrode confidence. Direct ownership of real assets provides investors greater control, eliminating unnecessary layers of managers and misaligned incentives.

Ownership links results to actual economic activity, not market shifts or fund manager decisions. With clear goals and better oversight, these interests stay aligned and result in healthier, more stable outcomes.

Historical Precedents

As we’ve seen in historical cycles, Wall Street has experienced a handful of stretches where real assets — property, commodities, and infrastructure — outperformed stocks. These moments illustrate the way markets shift, the way people respond, and why tangible assets can be such a powerful hold when times get rough or values go berserk. Its lessons still shape what people do with their money today.

The 1970s Stagflation

Stagflation in the ’70s was hard. Prices skyrocketed, and the economy hardly budged. Stocks gave up gains as inflation eroded returns, and traditional fixed income was no match.

Real assets like gold, farmland, and real estate retained their value better than stocks. Investors began seeking items that would hold their value in the face of increasing costs. Some moved instead to real assets, inflation-indexed bonds, or foreign equities. They yearned for something solid as cash and stocks were declining in value.

Gold, for instance, rocketed in price as individuals scrambled to shield their cash. Real estate appreciated as well, particularly in areas where rent tracked with inflation.

Key takeaways from the 1970s stagflation:

1. Inflation can reduce the real return on stocks and bonds.
2. Real assets might fare better in high inflation.
3. Diversification is crucial for weathering economic storms.
4. Value investing can occasionally outpace growth strategies in hard times.
5. As a historical precedent, possessing some tangible assets is a good hedge when markets reverse.

Real assets were a haven during slow growth and high prices. These lessons still resonate as inflation fears make a comeback.

The 2008 Crisis

The 2008 crash began in housing and moved quickly. Banks assumed too much risk and when the bubble popped, stocks plummeted. The S&P declined over 50% at the worst point.

Real assets, such as farmland and gold, experienced less harm. These assets held up as they weren’t tied to the exact risky lending that hit Wall Street.

There’s a history lesson in 2008: risk management matters. They learned to check their assets and diversify. Value investing outperformed growth in the years afterward, proving that trend-chasing can backfire.

The crisis altered corporate behaviors. Between 2008 and 2017, companies paid out 100% of their profits, marking a transition from growth to returning value to shareholders. Portfolios with some tangible assets frequently didn’t decline as much.

Resilience entered the vocabulary. Investors who constructed solid, diversified portfolios fared better than those who went all in on stocks.

Post-Pandemic Economy

Then came COVID-19, which once again altered the investing landscape. A lot of people recognized the benefits of holding physical assets in their portfolio. Supply chain problems, inflation, and low interest rates put a floor under things like warehouses, farmland, and renewables.

Stocks had a great run, but sky-high valuations and a series of nosebleed swings brought to mind those bubbles of yore: the 1920s, ’60s, and dot-com days. Others went to real assets for solid income and an inflation hedge.

The decline in non-residential investment as a share of GDP means fewer new projects. Real assets such as infrastructure and energy continued to attract interest. The pandemic accelerated trends in technology to be sure, but not every tech bet worked out. Real assets seemed like a great hedge.

Historically speaking, these precedents suggest that in the long run, the move toward real assets is likely to stick. The imperative to decentralize and diversify risk is baked into our time, its instinct and our future planning.

Strategic Transition

Strategic transition is all about taking large leaps in the way investors manage their capital, particularly when leaping from Wall Street to real assets. Such transition can be ignited by new industry trends, revised economic predictions, or a desire to achieve new financial objectives. Other times, government policies or global economic shifts force investors to reconsider their plans.

Throughout the roller coaster, reduce deep losses and more closely align investments to long-term plans. Real assets, which tend to be less liquid and not priced every day like stocks, can be a vital part of this transition. Rebalancing your portfolio toward increased real assets can help you control risk, increase returns, and hit defined targets.

Portfolio Diversification

Diversify means investing in a mix of different assets, including stocks, bonds, real estate, commodities, and more, to avoid having all your eggs in one basket. Sprinkling in hard assets such as real estate or infrastructure can reduce risk because these assets do not always trend the same way as equities or fixed income.

Including real assets in a portfolio can provide a hedge against market volatility, inflation, and even currency fluctuations. Investors could get a head start by incorporating global infrastructure funds, REITs, or other strategies into an existing blend. Some will opt for direct ownership of physical assets.

This diversified strategy is intended to help the portfolio remain stable when one sector sinks. It is designed to minimize whipsaw and assist in gaining long-term financial growth, even when markets are turbulent.

Direct Investment

Investing directly into real assets can generate better returns than those found in the usual Wall Street fare because investors eliminate intermediaries and take control of their own investment choices. This way, individuals can influence more of what they purchase, sell, or upgrade, be it the land, bricks and mortar, or infrastructure.

Control over timing and management usually translates into a nicer alignment with my values and objectives. However, it has its difficulties. Tangible assets may be difficult to evaluate or to liquidate rapidly. Some require big up-front sums or specialized expertise.

These obstacles require strategic planning to overcome. They’re smart to begin with part-ownership or partnerships to reduce risk while learning the business.

Due Diligence

Verifying the facts before purchasing actual properties is essential. Due diligence is about examining location, legal matters, market trends, and the condition of the asset itself. Investors have to consider risks such as evolving regulations, market dynamics, or unexpected expenses.

It’s important to look at who’s selling the asset, past results, and if the investment aligns with your risk comfort level. Researching profitable financial reports, special local regulations, and getting expert advice can help you avoid expensive mistakes.

Robust due diligence protects your stake and increases the potential for sustainable success.

Conclusion

Wall Street tends to lag real assets for obvious reasons. Stocks and bonds race ahead, but real assets like land or gold stay even-keeled in good and bad times. Real stuff has utility and demand, not just a number on a monitor. Big swings in policy or world events rattle stocks, but real assets frequently remain firm. Over extended periods, real estate and commodities keep pace with inflation and protect against currency devaluation. Data tells us real assets frequently win, even as trends shift. To construct a robust strategy, see beyond the chatter, consider the reality, and be open to alternatives to markets. Want to grow steady? See how real assets fit into your own journey.

Frequently Asked Questions

Why does Wall Street sometimes underperform real assets?

Wall Street can be driven by speculation and short-term fads. Real assets such as real estate or raw materials have inherent worth and can be more resistant to inflation, producing more reliable long-term returns.

What are real assets compared to Wall Street assets?

These are tangible, real assets, like real estate, infrastructure, or resources. Wall Street assets are things like stocks and bonds. Real assets provide a hedge, whereas Wall Street assets are vulnerable to market fluctuations.

How do macroeconomic forces affect Wall Street and real assets differently?

Macroeconomic factors, like inflation or currency shifts, tend to erode financial assets. That’s because real assets usually hold or appreciate in value during those times, offering a hedge against uncertainty.

What is the value disconnect between Wall Street and real assets?

Wall Street prices, fueled by speculation, can drift far from the inherent value of underlying businesses. Real assets tend to be tied to their physical value, which makes their valuation more apparent and more stable.

Can historical trends explain why real assets outperform Wall Street?

Yes, real assets have historically provided superior returns during times of high inflation or market turbulence. This trend underscores the defensive characteristic of real assets.

Are real assets less risky than Wall Street investments?

Real assets tend to have less market risk as their value is tied to tangible properties or commodities. Wall Street investments are more volatile and susceptible to investor sentiment.

Should investors consider transitioning to real assets?

Diversification into real assets can safeguard portfolios from inflation and market downturns. Most experts suggest some allocation to real assets for long-term financial safety.