Why do we buy depreciating assets?
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Consumerism is on the rise. We spend our life in a journey to acquire assets. We believe that the assets will help us to live our lives or help us during emergency times.
The nature of assets can be classified into 2 types i.e. appreciating, and depreciating. An appreciating asset is an asset whose value increases over time, after being subjected to market forces. Meanwhile, a depreciating asset is an asset whose market value decreases over time.
Assets like equity, debt, real estate and gold are some of the appreciating assets. It is because the value of these assets increases over times. However, the amount of capital appreciation will vary from asset to asset. For e.g., historically, equities have given a return of 14-15% on an average. Currently, real estate or property prices have hardly given a return of 2% in the last few years.
Meanwhile, a car is an appropriate example of a depreciating asset. Over time, with changes in technology and wear and tear, the value of a car actually reduces. In case of a car, even a brand new car in the second hand market is way less that what was paid for the car. That means if you bought a car for Rs.5 lakh and sold it after two days, you still won’t be able to sell at Rs. 5 lakh.
So, the real questing is, why do people buy depreciating assets at all?
This is the first and foremost point to examine when we talk about why people buy depreciating assets. It is important to know that not all decisions that we make are financial decisions and aimed at improving your portfolio management. Not all decisions we make a guided by an intrinsic need to make profit. There are quantitative decisions we make, but there are qualitative decisions we make as well.
Phones are a prime example of depreciating assets. But today, the need and importance of owning a smartphone is immense. So, in order to derive from that commodity, people buy phones. Same goes with cars. They do depreciate, but if you don’t want to use public transport, and travel with comfort, then buying a car is perhaps a right decision, despite it being a depreciating asset.
In India, a strong reason why people buy depreciating assets is simply because they do not know any better. Only a handful of people in the country are financially literate, and understand market dynamics efficiently. Because of lack of financial knowledge, people might just focus on income maximization instead of wealth maximization.
Without proper information or knowledge on to grow your money, people would usually resort to buying goods or make investments which have little to no yield value. And then until people are old enough to recognize this pattern and practice wealth management, it’s far too late. All the reasons above make sense. They are worthy reasons to acquire depreciating assets. But as newer generations are taking over, perspective and outlook about financial activities is also changing. A helpful rule to remember next time you buy anything is: “If it appreciates, buy it. If it depreciates, lease it.” This offers an optimum balance between deriving value, as well as appreciating your money.
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Tags: assets