The Two Jobs of an Asset

By Brad Thomason, CPA
 
 
For a word that gets thrown around as much as “asset,” you’d think it would have a pretty straightforward definition.  However, were you to take a spin by the bookstore of your local college, you might be surprised by what you would find flipping through the various texts.  Depending on the section you looked in, whether Economics, Finance or Accounting, the degree of variability between definitions might be great.  Some of what you would find would be obtuse to the point of engendering a reflexive eye roll.  (The one that has stuck with me all these years is, “The present value of future benefits,” which I’m pretty sure came from an Economics book.  Sure sounds like it must have, but I’m not really sure at this point; nor am I sure why I remember that one instead of the others…)
 
In simple terms, an asset is just a thing you own.  Your lawn mower is an asset.  That half-eaten jar of peanut butter in the cabinet of your vacation house, is an asset. 
 
In financial conversations, what’s being talked about is more specifically an investment asset or an “investable” asset (which is what some people call cash).  Assets of this type have two basic jobs: to provide a store of value, and to be the means of producing more assets.
 
The balance in your checking account is stored value, or what some people refer to as stored or deferred purchasing power.  As long as it’s sitting there, you can buy more stuff later on.
 
Having some stored value is better than having no stored value.  But the thing which really injects the energy into the financial equation is the second aspect, the ability of an asset to produce more; that is to say, generate a return.
 
This second job makes the asset more important over time, because it leads to there being a growing amount of stored value.  Which in turn makes it possible to produce even more new assets.  This back and forth is the actual mechanism of compounded returns, which some have called the 8th wonder of the world.
 
Although the idea of compounded returns is commonplace in investment discussions, the actual process itself is often misunderstood.  Which in turn leads to assets having less value over time than they could.  Or perhaps a better way to say that is it leads to you not getting as much out of your assets as they were capable of providing.  Incomplete understanding is often the prime cause of capital inefficiency.
 
We don’t have the space to get into all of the nuances here.  But a simple set of questions might help you to quickly measure whether or not your holdings are doing the full job.
 
Question 1:   Is this asset positioned to make more, or is it just a store of wealth?
 
Question 2:  Even if it is producing, what am I doing with those proceeds to keep the cycle going and expanding?
 
If you ask these two simple questions for each of your investments, you might get some interesting insight into what your next moves ought to be.  And if you apply them to other things which you maybe don’t think of as classic investments (e.g. equity in a home, value in a life insurance policy, even your credit-worthiness), your perspective on comprehensive planning might expand that much further.
 
Your assets can do two jobs for you.  If they aren’t doing both (and especially if they aren’t even doing one – i.e. you are storing wealth in a place where there’s a risk of losing it), that’s a good thing for you to know.
 
Knowing what to do by itself won’t make anything better.  Action is almost always necessary.  But nothing prompts action and informs the pathway like an expanded understating of your situation.  That expansion might literally be two simple questions away.