Where do real assets fit in?

Equities and bonds share a hidden vulnerability: both are claims denominated in money. When money itself loses value quickly, both can suffer at once — which is precisely what happened in 2022, and in the 1970s before it. Real assets are the family of things whose value is tied to physical stuff rather than to a fixed number of currency units.

The family

• Inflation-linked government bonds (TIPS in the US, linkers elsewhere) — the most direct instrument: principal and coupons adjust with a published inflation index. The cleanest inflation link available, and still exposed to real-rate moves, which is why they fell in 2022 alongside everything else.
• Real estate, usually held through REITs — rents can be re-set as prices rise, and buildings are physical. But listed REITs are also leveraged, listed equities, so their day-to-day behaviour follows the stock market more than the property market.
• Commodities — energy, metals, agriculture. Often the strongest short-run inflation link, because commodity prices are frequently the cause of the inflation being measured. No cash flow, high volatility, and long stretches of flat-to-negative real returns.
• Infrastructure — toll roads, pipelines, utilities, often with contractual inflation escalators. Frequently held privately, which raises the cost and lowers the liquidity.

The honest version of the inflation-hedge claim

The pitch is that real assets protect against inflation. The accurate version is more careful, in three ways:

1. The link is real but loose. Commodities have historically responded strongly to unexpected inflation. Real estate reprices with a lag — leases take years to roll. Equities are a poor short-run hedge and a decent very-long-run one.
2. The protection is bought, not free. A commodity sleeve typically brings volatility comparable to equities with no dividend or coupon underneath it. You are paying in expected return and in variability for a hedge that only pays off in specific regimes.
3. "Real asset" is a behaviour claim, not a guarantee. Listed REITs fell roughly 25% in 2022 — a year of high inflation — because rising real rates hurt leveraged property owners more than inflation-linked rents helped them.

A rounded illustration

Consider a stylised inflationary year: consumer prices +8%, a broad equity index −18%, a broad bond index −13%, a broad commodity index +16%.

A mix of 60% equity and 40% bonds returns roughly (0.6 × −18%) + (0.4 × −13%) = −10.8% − 5.2% = −16.0% nominal, which is about −22% in real terms once the 8% price rise is divided out: 0.84 ÷ 1.08 − 1 = −0.222. Subtracting the two figures gives −24% and overstates the damage by nearly two points — real returns divide, they do not subtract.

Move 10 percentage points from equity into commodities: (0.5 × −18%) + (0.4 × −13%) + (0.1 × +16%) = −9.0% − 5.2% + 1.6% = −12.6%. The sleeve reduced that year's loss by roughly 3.4 percentage points.

Now the other side of the same ledger, which is the part that gets left off slides: run the identical sleeve through a decade in which commodities returned roughly zero while equities compounded at 10% a year, and the same 10-point shift costs about 1 percentage point of return every single year for ten years. The hedge that helps in the rare year is paid for in all the ordinary ones. Whether that trade is worth making is a judgement about a specific portfolio's obligations — not something a course can decide for you.

In the data

The price most people mean by "oil" is a reference price for a physical barrel of US crude delivered at Cushing, Oklahoma:

It is a quote, not an instrument. Nobody holds that barrel in a portfolio; holding oil means holding futures and rolling them, so a change in this price is a change in a quoted price, not the return anyone could have earned. The same is true of most commodity series you will see quoted.

Try it now

1. Gold — the most-cited real asset — and a broad equity index, five years each. Measure both across 2022, the high-inflation year sitting in the middle of the window, and rank them. Does the ranking match what "inflation hedge" would have led you to expect?

2. Now the cost side, which is what gets left off slides. Below is a commodity reference price over its full history: note the long flat-to-negative stretches, and note something more important than any of them — a change in this line is a change in a quoted price, not the return of anything that could have been held. Holding it would have meant rolling futures, and you have seen what that costs.

3. In one sentence, name the risk that inflation-linked bonds and nominal bonds shared in 2022. Both are discounted at a real rate, and that rate rose — which is why "real asset" is a behaviour claim rather than a guarantee.