Investable Assets

July, 11 2025

By Peter Mladina, Executive Director of Portfolio Research, Wealth Management
By Charles Grant, Director of Asset Allocation Research, Wealth Management

Capital Assets

Capital assets finance the economy. They take the form of all kinds of debt and equity instruments. Capital assets derive value from their future cash flows. Their market value is the present value of all their discounted future cash flows, where the cost of capital (discount rate) is the expected return in a competitive market. For example, stocks derive value from their future earnings and dividends. Bonds derive value from their future interest and principal payments. And real estate derives value from future rents, though rents ultimately service debt and equity claims.

Capital assets have some positive expected return over the risk-free return, which is typically represented by the return of Treasury bills. This return premium — or risk premium — is compensation for bearing the risk in receiving uncertain future cash flows. Without such a premium, a rational investor would prefer the risk-free return. Importantly, investors do not typically hold cash as fiat currency but as high-quality, ultra-short-term debt such as Treasury bills that pay interest and generally maintain purchasing power (i.e., store value). In contrast, central banks intentionally devalue fiat currencies by the rate of inflation.¹

Exhibit 1 shows nominal and real (inflation-adjusted) returns of major U.S. capital assets: stocks, long-term government bonds and Treasury bills over the last 125 years (1900 to 2024).² The risk premium is the return of stocks or bonds over the return of bills (the risk-free asset).

First, we observe that the long-term returns of all capital assets, including risk-free bills, are higher than the rate of inflation. Capital assets maintain purchasing power over the long run. Second, we observe that the long-term returns of riskier stocks and bonds are higher than the return of risk-free bills, and statistical tests indicate that these risk premiums are robust (i.e., not likely random). Riskier capital assets are compensated with a long-term return premium over the risk-free return.

The historical record confirms that capital assets are attractive investable assets in a portfolio. Stocks and bonds offer an expected return above the risk-free return so that investors can fund liabilities (goals) and generally build and preserve wealth. Capital assets can be used to control risk (low-risk bills and bonds), hedge liabilities (high-quality, duration-matched bonds), diversify returns (lowly correlated bills, bonds and stocks) or provide high returns (stocks) within a diversified investment portfolio.

Utility-based Assets

Utility-based assets derive value from their utility, or usefulness. Examples include commodities and currencies, though capital assets also have utility as financing vehicles.

Commodities have utility as fundamental inputs into the economy. They include oil and gas, agricultural commodities, and industrial and precious metals. Gold in particular is often considered an investable asset. It was originally a scarce ornamental commodity prior to being used in coinage (as currency). Gold has commercial and industrial uses in the real economy, providing price support. For example, gold jewelry is a consumer good, analogous to fashionable clothing and handbags. It is also used in various industrial processes with applications in electronics, aerospace and medicine, among others. But as an investable asset without future cash flows, does it offer a reliable return premium above the risk-free return? Exhibit 2 shows gold’s nominal, real and risk-premium returns over the last 55 years.³

Exhibit 2 – Gold Returns

Gold’s annualized risk premium over the risk-free Treasury bill return is only 0.8%, and it is not statistically significant. In other words, this return premium is indistinguishable from zero. In fact, centuries of gold-price data confirm that gold merely appreciates with the overall price level in the economy (i.e., with inflation) over the very long run.⁴ However, this long historical record also shows that gold is not a reliable inflation hedge because it can deviate from the overall price level for extended periods of time. Gold has a standard deviation (volatility risk) of 24% since 1970. As an investable asset, it is analogous to offering an inflation-like expected return, but with the high risk of equities. A rational investor would choose the risk-free Treasury bill return over gold, making gold an inferior investable asset. All commodities generally share this characteristic.

Currencies (money) have utility as legal mediums of exchange that facilitate efficient buying and selling of goods and services in the real economy. Economists say that money has three functions: medium of exchange, unit of account and store of value. But the unit of account and store of value features are derived from a currency’s utility as a medium of exchange. Fiat currency would be worthless paper — offering no store of value or economically relevant unit of account — without its utility as a medium of exchange.

The long-term real return of the U.S. dollar is -2.9%, which is the negative inflation rate in Exhibit 1. This is why investors prefer to own Treasury bills over fiat currency for the cash allocation in their investment portfolio. Although fiat currency has considerable utility in the real economy, it is an inferior investable asset.

Faith-based Assets

Faith-based assets have no future cash flows and no utility. Their value is derived from sentiment. Bitcoin is an example. It is the first and largest cryptocurrency. The original libertarian intent was to create a secure, decentralized, private currency — an alternative medium of exchange. While that ideal appeals to many, it has failed to achieve that objective. Bitcoin is not increasingly used as a medium of exchange. Transaction volumes for goods and services are down. Transactions are costly and inefficient relative to current payment processing technologies for fiat currencies. It is rarely used for common purchases even where it is legal tender (e.g., El Salvador). There is really no evidence it is becoming “the future of money.”

Importantly, this critique does not apply to stablecoins. Their value is underpinned by fiat cash, Treasury bills and other high-quality assets.⁵ Stablecoins have utility as a kind of money market fund and potential future payments system. Indeed, large banks and major retailers are currently evaluating how to use stablecoins to create more efficient payments systems.

Due to bitcoin’s failure as a medium of exchange, the narrative has changed to a “store of value.” However, as previously noted, currencies derive the store-of-value feature because of their utility as a medium of exchange, which bitcoin lacks. Exhibit 3 shows the standard deviation of bitcoin since its financialization through spot exchange-traded funds (ETFs) last year compared to the long-term standard deviations of gold, stocks, long-term government bonds and bills.⁶ Bitcoin is far too volatile to be a reliable store of value. Clearly investors have a hard time valuing an asset without future cash flows or utility.

Exhibit 3 – Bitcoin Risk

There is no doubt that historical bitcoin returns have been phenomenal, but 16 years is far too short of a history to confirm it has a positive forward-looking expected return, especially since it was financialized only last year with the launch of spot ETFs. Bitcoin’s value is not backed by any future cash flows or utility in the real economy. Even its scarcity is artificial. There are bitcoin clones, and it is easy to create new coins that perfectly replicate its protocol. We believe sentiment best explains its value, making it a faith-based asset. Sentiment is a very shaky foundation for value.

For all these reasons, we believe investors should build portfolios predominately from capital assets to increase the odds of achieving good long-term wealth outcomes.