Investors are bracing themselves for the outcome of the US presidential election this Tuesday. With record numbers of voters voting by mail, it could be days or weeks before a winner is announced, and many have hedged against a contested election that could drag on until January. With so much uncertainty and turbulence in the market, investors are worried about what this means for their portfolios.
The good news is that these current events are not expected to impact farmland investments. Nothing about the fundamentals of farmland investing has changed, and no matter who is elected this November, US farmers are expected to continue enjoying bipartisan support they’ve had for many decades. Read on to learn more and find out how investing in farmland can help you manage your portfolio in these turbulent times.
Even in the best of times, election years can be tough on investors’ nerves. Over the past 90 years, for example, the S&P has returned an average of ~8.5% per annum but only 6% on average in election years.
This election is more fraught than most. We may not know the outcome until days after November 3rd. Because of the COVID-19 pandemic, record numbers of voters will be voting by mail, and many states have pledged to count ballots for several days after the election. There is the risk that if the race is close enough, election day could be followed by weeks of court battles, possibly dragging out until the inauguration on January 20th.
This concern is widespread among investors. According to Bank of America’s fund manager survey, 61% of investors believed that the US election will be contested. This concern is backed up by data. The VIX, Wall Street’s preferred measure of fear among investors, dramatically shot up above its four-month average this week, and VIX futures are elevated through January as investors seek to hedge against market volatility.
Fear among investors has also led to significant losses across all major stock indices this week. In addition to the election, several other factors contributed to the mass sell-off, including steadily rising COVID cases across the US, new restrictions in France and Germany, and the realization that Congress will not pass a new stimulus bill before the election.
In contrast to this bad news, farmland continues to perform well. The NCREIF Farmland Index is up nearly 1% in Q3 2020.
2020 has been a year of record stock market volatility, and it seems likely that we’ll face many more months of uncertainty ahead.
Volatility in the stock market can be perilous for your portfolio for a couple of reasons. First, uncertainty creates fear. It’s scary to watch the value of your investments decline sharply in weeks or days. Fear can lead to panic selling, or selling stocks when they dip.
Second, even if you don’t panic sell, volatility can eat into your returns long-term. Although a portfolio with high volatility is more likely to experience higher returns in any one year than a low-volatility portfolio, it can also experience greater losses. These losses compound, which means lower long-term returns (known as “volatility drag”). For example, even though the stock market experiences higher average returns than bonds, over several years a diversified portfolio of stocks and bonds will outperform an all-stock portfolio.
In contrast to the stock market, farmland experiences fairly low volatility. Farmland is underpinned by strong market fundamentals — at the end of the day, the global population continues to increase and everyone needs to eat. Investing in farmland helps meet that need. US farmland also has scarcity value, as the supply of farmland has declined nearly 20% since the mid-1960s.
To combat volatility and build wealth long term, it is essential to have a diverse portfolio. By allocating your portfolio among multiple uncorrelated asset classes, you reduce volatility drag and make your investments more resilient to swings in the stock market.
There are many options for diversifying your portfolio. In addition to diversifying stock holdings among multiple industries, many investors choose to allocate their investments to a mixture of stocks, bonds and cash or cash equivalents. Adding some lower-risk assets to your portfolio helps preserve capital when the stock market crashes.
Investors should also consider diversifying into alternative investments. The benefits of adding alternatives to your portfolio are by now well researched and documented (you can find more information on that on our website). There are a wide range of alternative investments, including everything from real estate, to farmland, to gold, to a rare stamp collection. Alternatives have several features that make them a good complement to a core portfolio. In addition to being uncorrelated with publicly traded securities, most alternatives are also less volatile and offer similar or better returns.
For example, diversifying into farmland offers many of the benefits of stocks while reducing portfolio volatility. Farmland is less volatile than both the stock market and real estate, and unlike the stock market, farmland has offered investors positive returns every year since 1991.
In volatile times, it’s important to focus on the long-term; time mitigates the impact of volatility on a diversified portfolio. The longer your investment horizon, the less the volatility of your total portfolio’s total average returns.
Shifting your mindset to focus on long-term investing has two other benefits. First, if you keep your long-term goals in mind, it takes emotion out of the equation. Second, focusing on long-term goals enables you to make investments with a longer time horizon, such as farmland. Long-term investments like farmland are less volatile than short-term investments and offer the benefit of passive income.
Farmland is a long-term investment that offers stable, attractive returns and a good hedge against economic downturns. Farmland investors get paid in two ways: they receive periodic dividend payments from their investments and they get the benefit of price appreciation when the asset is sold. Between 1998 and 2018 farmland total average returns were ~10% per year, including dividends and price appreciation. Farmland typically does well when there is a recession. In contrast to the stock market crash during the Great Recession, the NCREIF Farmland Property Index was up 20%+ in 2008 - 2009.
All in all, the most important thing in difficult times like these is to understand your risk tolerance and keep your investment goals in perspective. Before you invest your money, it’s important to have a solid understanding of how much risk you want in your portfolio and what your appetite for loss is. And by keeping in mind your long-term plans for your portfolio, you can avoid getting caught up in current events and choppy markets. Instead, think about where you want your portfolio to be in the next five to ten years and how you can invest to get there.
If you’re tired of nervously checking your stock portfolio every time you read the news, though, it may be time to reorient towards farmland. US farmland is poised to benefit regardless of who wins the election this fall. Farmland is an issue with bipartisan support: eight out of 10 voters believe that a vibrant agricultural industry is critical to national security.
When you invest in farmland, you are putting money behind our most basic need — the need to eat. Farmland delivers returns comparable to those of the stock market with significantly less volatility, so you can feel comfortable that your portfolio will continue to meet your investment goals in the years to come.
Using FarmTogether’s innovative, technology-enabled investment platform, accredited investors have access to a wide range of opportunities to invest directly in institutional-grade US farmland. FarmTogether’s team of investment professionals provides carefully sourced and diligenced farmland opportunities, taking the guesswork out of investing.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.