What Percent of Net Worth Should Be Hard Assets?

Hard assets are tangible objects, such as land, an office building, a barrel of oil, a gold coin or a diamond. Their chief appeal is that they retain some value no matter how far their market prices may fall. However, such assets are often illiquid -- hard to sell quickly at a good price -- and many lack ongoing returns. You won't get dividends from diamonds. The money that goes into a modern-day treasure chest of gold and gems could instead earn twice-a-year dividends from a virtually risk-free Treasury note. The value of earnings you missed out on is called your opportunity cost.

One popular option for investing in income-producing hard assets is to buy into real estate investment trusts, which by law must pay out 90 percent of their income as dividends. Some advisers recommend REIT holdings of as little as 5 percent, a proportion that is more typical for high-risk investments. Other advisers recommend as much as 20 percent if the REITs represent a range of real estate types. There are also hard-asset mutual funds, which invest in shares of companies that handle commodities. The manager of one such fund recommends hard-asset holdings of 17 percent for middle-aged investors.

Income-producing hard assets include expensive equipment, such as medical diagnostic equipment; mineral rights that pay royalties; a vacation home to rent out for part of the year; agricultural land for lease to a farmer; or an office or apartment building. Managing real estate investments can be time consuming, however. If a real estate holding puts you into direct contact with many lessors and renters, you should factor in the cost of hiring a good manager when you consider the investment. Advisers' recommendations for direct real estate holdings -- including the investor's home -- tend to run about 30 to 35 percent.

Investment advisers are divided on whether a home should be considered an investment or an expense. Sixty years ago, you could base your investment strategy on buying a lavish home and selling it when you reached retirement age, but not any more. Unless you run a bed and breakfast or build a mother-in-law apartment, you won't make money from living in a fancy house. You can't count on bagging much appreciation when you sell the house, either, unless you can afford to wait for favorable prices. Americans have learned that much from the last 20 years of housing-price history.