Appreciating Versus Depreciating Assets
Comparing Appreciating and Depreciating Assets
An appreciating asset is one that goes up in value over time. A depreciating asset is one than goes down in value over time.
Why Appreciating Assets are Important
If you want your net worth to go up over time then buy mostly appreciating items. Depreciating assets are no different than spending cash, in fact in many cases they increase the rate of spending as they also need additional expenses to hold on to them.
Types of Appreciating Assets
Unique items and items that meet basic human needs usually go up in value due to the average demand exceeding supply over time. A Van Gogh painting is highly recognised and unique, so as long as there is interest in his work people will compete to purchase his work when it becomes available. As for basic human needs, nothing is more required than a house, but in fact a house is over time a depreciating asset as it wears out, becomes old fashioned and it fades from demand. BUT, the land it is on generally goes up. Property is one of the best assets to buy, if you know what to buy.
Many buy items of personal value to them, jewelry and cars that depreciate rapidly. For example, lets buy a gold necklace which has a large profit placed on it because the jeweler's effort to create it is in addition to the cost of the raw materials. Demand is good allowing them to price it high. As soon as it is sold the price drops to a half or even a quarter of the original price because the price for second hand goods is never as good and most want the newest styles.
Cars are obvious, they wear out, become dated in style, they fade from interest. They are also a status symbol for those who wish to advertise their success, so that keeps the new car market healthy, especially luxury cars. There are others that just love the pleasure of driving a well engineered and beautiful car. These factors keep demand high enough for expensive cars.
How to Choose a Balance Between Appreciating and Depreciating Assets
Simply put, if your total losses on depreciating items exceeds your total gains on appreciating items then your net worth will be going down. Choose a mix that increases your net worth.
To calculate this a detailed balance sheet and cashflow need to be kept. Project a forward estimate of an asset's value over 5, 10 and 20 years. There are plenty of online resources available to determine this. Then you may determine how much value is lost or gained per year. For example property might gain on average 4-5% per year, and cars lose 10-20% per year. Add up the money value (current value times percentage) of each of ALL of your asset's gains or losses per year. You will be losing equity if the result is less than zero and gaining if greater than zero.