You’ve probably come across the term “asset” many times in your life — long before you began saving and investing.
What is an asset? Generally, the word may be used to refer to anything of value — from a great work ethic to a great group of friends. But when you’re talking about finances, the term asset is typically used to refer to things that have economic value to a person, a company, and/or a government.
Exploring the Definition of an Asset
For individuals, an asset can mean pretty much everything they own — from the cash in their wallet to the car in their garage to necklaces, rings, and earrings in a jewelry box. But usually, when people talk about their personal assets, they’re referring to something worth money.
Broad Categories of Assets
Assets typically include such things as:
• Cash and cash equivalents, including checking and savings accounts, money market accounts, certificates of deposit (CDs), and U.S. government Treasury bills.
• Personal property, including cars and boats, art and jewelry, collections, furniture, and things like computers, cameras, phones, and TVs.
• Real estate, residential or commercial, including land and/or structures on the land.
• Investments, such as stocks and bonds, annuities, mutual funds and exchange-traded funds (ETFs), and so on.
Those who freelance or own a company also may have business assets that could include a bank account, an inventory of goods to sell, accounts receivable (money they’re owed by their customers), business vehicles, office furniture and machinery, and the building and land where they conduct their business.
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Delving Into Different Types of Assets
Generally speaking, there are four different types of assets: current or short-term assets, fixed assets, financial investments, and intangible assets.
Current Assets
Current assets are short-term resources with economic value, and are typically referred to in accounting. Current assets are things that can be used or consumed or converted to money within a year. They include things like cash, cash equivalents, inventory, and accounts receivable.
Fixed or Noncurrent Assets
Fixed assets are resources with a longer term, meaning more than a year. This includes property, like buildings and other real estate, and equipment.
Financial Assets
Financial assets refer to securities or assets such as stocks, bonds, certificates of deposit (CDs), and preferred equity.
Intangible Assets
Assets considered intangible are things of value that don’t have a physical presence. This includes intellectual property like patents, licenses, trademarks, and copyrights, and brand value and reputation.
Identifying and Classifying Assets
Assets are things with economic value. They may be owned by you, like a sofa or your computer, or owed to you, like the $50 you loaned a friend. The loan or borrowed money is considered an asset for you since your friend will repay it to you.
Personal vs Business Assets
There are both personal assets and business assets. Personal assets include such things as your home, artwork you might own, your checking account, and your investments. Business assets are things like equipment, cash, and accounts receivable.
Liquid Assets and Their Convertibility
Liquid assets are things of economic value that can be quickly and easily converted to money. Liquid personal assets might include certain stocks, and liquid business assets could include inventory.
Assets in Accounting and Business Operations
In business, assets are resources owned by a business that have economic value. They might refer to the building the business owns, inventory, accounts receivable, office furniture, and computers or other technology.
How Assets Reflect on Financial Statements
Business assets are listed on a company’s financial statements. Ideally, a company’s assets should be balanced between short-term assets and fixed and long-term assets. That indicates that the business has assets it can use right now, such as cash, and those that will be available down the road.
The Distinction Between Assets and Liabilities
Assets are resources an individual or business owns that have economic value. Assets are also things owed to a business or individual, such as payment for inventory. A liability is when a business or individual owes another party. It could include things like money or accounts payable.
Asset Valuation and Depreciation
Asset valuation is a way of determining the value of an asset. There are different methods for determining value, such as the cost method, which bases an asset’s value on its original price. But assets can depreciate over time. That’s when an accounting method known as depreciation is used to allocate the cost of an asset over time.
Real-World Examples of Assets
As noted, assets can run the gamut from the physical to the intangible. What they all have in common is that they have economic value.
Everyday Items That Count as Assets
Many items that you use or deal with in your daily life are considered assets. This includes:
• Cash
• Bank accounts
• Stocks
• Bonds
• Money market funds
• Mutual funds
• Furniture
• Jewelry
• Cars
• House
• Certificates of deposit (CDs)
• Retirement accounts, such as 401(k)s
High-Value Assets in Today’s Market
The larger assets you own tend to be more valuable, such as your house, a vacation home, or rental property. Your investments may also be considered high-value assets, depending on how much they are worth.
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The Nuances of Non-Physical and Intangible Assets
Intangible assets, or those that have no physical presence, can be extremely important and quite valuable. So it’s wise to be aware of what they are.
Understanding Goodwill, Copyrights, and Patents
Intangible assets are such things as copyrights (on a book or piece of music, for instance) and patents (for an invention). A copyright protects the owner who produced it, and a patent protects the patent owner/inventor. What this means is that another party cannot legally use their work or invention without their permission.
Goodwill is another intangible asset, and it’s associated with the purchase of one company by another company. It is the portion of the purchase price that’s higher than the sum of the net fair value of all of the company’s assets bought and liabilities assumed.
For example, such things as brand value, reputation, and a company’s customer base are considered goodwill. These intangibles could be highly valued and the reason why a purchasing company might pay more for the company they are buying.
The Role of Digital Assets in the Modern Economy
Digital assets refer to such things as data, photos, videos, music, manuscripts, cryptocurrency, and more. Digital assets create value for the person or company that owns them.
Digital assets are becoming increasingly important as individuals, businesses, and governments use them more and more. With more of our every day resources online, and with data stored digitally, these types of assets are likely to be considered quite valuable.
Labor and Human Capital: Are Skills and Expertise Assets?
Labor is not considered an asset. Instead, it is work carried out by people that they are paid for.
Human capital refers to the value of an employee’s skills, experience, and expertise. These things are considered intangible assets. However, a company cannot list human capital on its balance sheet.
Navigating Asset Management
As an investor, you’re also likely to hear about the importance of “asset allocation” or “asset management” for your portfolio. Asset allocation is simply putting money to work in the best possible places to reach financial goals.
The idea is that by spreading money over different types of investments — stocks, bonds, cash, real estate, commodities, etc. — an investor can limit volatility and attempt to maximize the benefits of each asset class.
For example, stocks tend to offer the best opportunity for long-term growth, but can expose an investor to more risk. Bonds tend to have less risk and can provide an income stream, but their value can be affected by rising interest rates. Cash can be useful for emergencies and short-term goals, but it isn’t going to offer much growth, and it won’t necessarily keep up with inflation over the long term.
When it comes to volatility, each asset class may react differently to a piece of economic news or a national or global event, so by combining multiple assets in one portfolio, an investor may be able to help mitigate the risk overall.
Alternative investments such as real property, precious metals, and private equity ventures are examples of assets some investors also may choose to use to counter the price movements of a traditional investment portfolio.
An investor’s asset allocation typically has some mix of stocks, bonds, and cash — but the percentages of each can vary based on a person’s age, the goals for those investments, and/or a person’s tolerance for risk.
If for example, someone is saving for a wedding or another shorter-term financial goal, they may want to keep a percentage of that money in a safe, easy-to-access account, such as a high-yield online deposit account. An account like this would allow that money to grow with a competitive interest rate while it’s protected from the market’s unpredictable movements.
But for a longer-term goal, like saving for retirement, some might invest a percentage of money in the market and risk some volatility with stocks, mutual funds, and/or ETFs. This way the money may potentially grow over the long-term, and there may likely be time to recover from market fluctuations. As retirement nears, some people may wish to slowly shift their investments to an allocation that carries less risk.
The Role of Automated Asset Management Solutions
Businesses may want to consider using automated asset management systems to track and collect data on their assets. This may be easier than manually tracking assets, which could become complicated and overwhelming. There are a number of different software programs available that could help businesses with this.
Individual investors might want to think about automated investing programs to help manage their financial portfolio. These platforms may help those who want to invest for the long-term but don’t have the time or expertise to do it themselves.
However, It’s important to do your homework and consider the risks involved since automated platforms are not fully customized to each individual’s specific needs. You also need to be comfortable with the types of investments they may offer, such as ETFs, and make sure you understand the risks and possible costs involved.
Unpacking Asset Classifications Further
The assets you accumulate will likely change over time, as will your needs and your goals. So, it’s important to know the purpose of each asset you own — as well as which ones are working for you and which ones aren’t. Here are some questions you can ask yourself as you mindfully manage your assets:
1. Are you getting the maximum return on your investment, whether it’s a savings account or an investment in the market?
2. How does the asset make money (dividends, interest, appreciation)? What must happen for the investment to increase in value?
3. How does the asset match up with your personal and financial goals?
4. Is the asset short-term or long-term?
5. How liquid is the investment? How hard would it be to sell if you needed money right away?
6. What are the risks associated with the investment? What is the most you could lose? Can you handle the risk financially and emotionally?
If you aren’t sure of the answers to these questions, you may wish to get some help from a financial advisor who, among other things, can work with you to set priorities, suggest strategies for investing, assist you in coming up with the right asset allocation to suit your needs, and draw up a coordinated and comprehensive financial plan.
Short-term vs Long-term Assets
As a quick recap, short-term assets are those held for less than one year. They are also known as current assets. These assets are typically meant to be converted into cash within a year and are considered liquid. For individual investors they can include such things as money market accounts and CDs.
Long-term assets are those held for more than one year. Long-term assets can be such things as stock and bonds, as well as fixed assets such as property and real estate. Long-term assets also include intellectual property such as copyrights and patents. Long-term assets are not as liquid as short-term assets.
The Importance of Asset Liquidity
Liquid assets can be accessed quickly and converted to cash without losing much of their value. Cash is the ultimate liquid asset, but there are plenty of other examples.
If you can expect to find a number of interested buyers who will pay a fair price, and you can make the sale with some speed, your asset is probably liquid. Stock from a blue-chip company is generally an asset with liquidity. So, typically, is a high-quality mutual fund.
Some assets are non-liquid or illiquid. These assets have value, but they may not be as easy to convert into cash when it’s needed. Your car or home might be your biggest asset, for example, depending on how much of it you actually own. But It might take a while to get a fair price if you sold it — and you’ll likely need to replace it eventually.
While some investments have long-term objectives — including saving for a secure retirement — liquidity can be an important factor to consider when evaluating which assets belong in a portfolio.
Many unexpected events come with big price tags, so it can help to have some cash or cash equivalents on hand in case an urgent need comes up. General recommendations suggest having three to six months’ worth of living expenses stashed away in an emergency fund — using an account that’s available whenever you need it.
Some might also consider keeping a portion of money in investments that are reasonably liquid, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). This way, ideally, the assets can be liquidated in a relatively quick timeframe if they are needed. (Although, of course, there’s never any guarantee.)
Choosing that original asset allocation is important — but maintenance and portfolio rebalancing is also key over time. As people attain some of their short- or mid-range goals (paying for that wedding, for instance, or getting the down payment on a house) they may wish to consider where the money will go next, and what kind of account it should be in.
As life changes, it is possible that the original balance of stocks vs. bonds vs. other investments is no longer appropriate for a person’s current and future needs. As a result, they may want to become more aggressive or more conservative, depending on the situation.
Rebalancing also may become necessary if the success — or failure — of a particular asset group alters a portfolio’s target allocation.
If, for example, after a big market rally or long bull run (both of which we’ve experienced in recent years) a 60% allocation to stocks becomes something closer to 75%, it may be time to sell some stock and get back to that original 60%. This way, an investor can protect some of the profits while buying other assets when they are down in price.
You can do your rebalancing manually or automatically. Some investors check in on their portfolio regularly (monthly, quarterly or annually) and adjust it if necessary. Others rebalance when a set allocation shifts noticeably.
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