Assets vs. Income

In theory, distinguishing assets from income is quite simple. In practice, there are many nuances to consider when thinking about investments. Three important differences between them is that assets tend to accumulate over time, can increase in value and that historically a tiny fraction of the population had access to asset accumulation. The exclusivity of asset accumulation has led to much of the disparity in wealth that we see today.

Financial assets are generally defined as something of economic value that is owned by an individual or corporation that offers the chance of gain in the future. For instance, a stock is owned today with the notion that it can be sold at some point in the future — converting asset value into income.

For the individual, income is the amount of their earnings from wages, property sales and returns on investments. So besides wages that are paid directly from a job, there are also other forms of income like the above mentioned sale of stocks that would eliminate an asset and turn it into money.

Things get a little more complex when a stock pays dividends. The dividend a stock pays comes to you in the form of income without having to sell the underlying stock. This is why some investors favor stocks that pay dividends. The expectation of future income from dividends is also considered an asset that becomes income as it is paid.

Another common example is houses owned for rental income. The house is an asset that may be sold in the future to generate income. However, if one rents the house, then the rental money coming in is income earned without selling the asset. So if the real estate market is climbing, then your asset is gaining value at the same time that it is generating an income stream. When you read statistics like 85% of the world’s wealth is held by 11% of the population — this is part of the reason. Assets like stocks and rental homes increase in value and generate income. This income can be converted into other assets and the process accelerates. The more assets that you hold, the more opportunities you have to generate income that can be converted into more assets. Income spent on non-assets is simply gone.

Assets also offer flexibility. If you own rental properties, you can borrow against the value of the property to generate income for further investment or for some other reason. A DeFi app like Nexo allows you to deposit an asset, Bitcoin or other cryptocurrency, and borrow against the value of the asset. If Bitcoin goes up in value, then the increase in value can be used to pay off the loan or to borrow more money. If Bitcoin goes down in value, then it may be necessary to sell the Bitcoin to cover the value of the loan and hence complete the conversion of an asset to income. In both cases, holding the asset gives the holder the opportunity to convert it to income if desired and thus provides a cushion against economic downturns or a chance to invest in times of opportunity.

Income’s value is by definition realized in the moment. If you pay rent, then you have converted some of your income into a place to live. However, the value of your income is now gone. There is no chance that it will grow in value or that you can, for instance, borrow against it. While we need income to live, the capacity of assets to accumulate value over time is a clear advantage.

Historically, assets were difficult to impossible to accumulate. Most individuals did not have the opportunity to acquire assets. For most of history, land was the single greatest asset. In much of the world, the vast majority of citizens were precluded by law from purchasing land. So the single greatest source of wealth and power was sealed off. One of the primary drivers of immigration to the Americas from Europe was the possibility of acquiring land. The majority of rural workers in Europe would have had little to no chance of gaining title over the land they worked. The prospect of having their own land drew millions to take the incredible risks of moving to the Americas. The challenge has not abated. Even today about 50% of England is owned by 1% of the population and women in the half the world still have legal barriers to land ownership.

Today, access to assets is increasing rapidly. While many scoff at the long-term viability of cryptocurrencies, they have demonstrated a hunger for the opportunity to invest that has long been denied to much of the world’s population. Curiously, it is often precisely those who hold most of the traditional assets — stocks, bonds, land — that have been vocal in criticizing the rise of this new class of assets. Further, some single dealer platforms like Structure make it possible to trade between cryptocurrencies and stocks, blurring the lines between what has been heretofore seen as very different products. Indeed, it is difficult to see how the massive wealth disparities in the world can be overcome without creating new asset classes — whether cryptocurrencies or some other — that give the have-nots a chance to enter the world of investing.

Does this mean acquiring assets is always the best use of income? Income is taken in the present — the money you have available in the present or near future. Assets, on the other hand, are about the future. Because the future is unknown, assets generally carry more risk than income. The value that has been predicted for a particular asset may decline or simply vanish altogether. The value of income is, by definition, fixed because it is the amount of money that has been realized. This reduces risk but also eliminates the possibility of accruing more value. When part of employees’ salaries are withheld for retirement investment plans, the argument is that you will likely get greater value in the future than you would from anything you could spend the money on in the present. One of the threats of hyper-inflation is that it wipes out the purchasing power of people’s savings. They would have been better off spending the money in the past rather than trying to save it for an unknown future. So when value is realized is very important. Income taken now and spent on non-assets precludes building greater wealth through the accrual of asset value, but it also eliminates the risk that assets that have been purchased might lose value or become altogether worthless.

Finally, different investment strategies of income, assets, and assets that generate income can have widely divergent outcomes. There is, in fact, no correct answer to what the best strategy might be. Given the wide range of individual goals, interests, risk tolerances and opportunity, diametrically opposed approaches might both be correct for different people. History has shown, however, that assets tend to generate more assets and that this process has been one of the greatest drivers of wealth, power and opportunity. Perhaps most significantly, technological changes in the last decade are beginning to create a world where most of the population will have, for the first time, the option to think about purchasing assets.