Farmland's Lack Of Correlation To Major Asset Classes
2020 was a year of unprecedented stock market volatility, and 2021 looks like it could be just as turbulent. With this much uncertainty in the air, investors are looking harder than ever for assets that are uncorrelated with public markets. Fortunately, farmland investing is one attractive alternative.
Not only is farmland uncorrelated to other major asset classes such as stocks, bonds or real estate, but it offers investors the benefit of lower volatility and attractive returns. Read on to learn more about why diversification into uncorrelated asset classes is important and how farmland investing can protect your portfolio from market shocks.
Stock market volatility continues into 2021
With the activity around GameStop (NYSE: GME) in January and February this year, stock market volatility has been a topic of conversation among more people than ever. While most stocks haven’t been as volatile as GameStop, the whole episode is an extreme example of some of the risks in investing in single stocks. While many investors managed to walk away with thousands of dollars in profit, others found their investments worth next to nothing.
Even investing in a broader index doesn’t protect you from all market volatility. 2020 was a roller coaster ride for investors. If it feels like the markets are only getting more volatile, that’s not your imagination. The median volatility of the stock market has increased by nearly five percentage points over the past twenty years.
Volatility can be bad news for a couple of reasons. First, it’s stressful, which is bad for both your health and your portfolio. Stressed investors make decisions based on emotion rather than long-term investment goals, which often leads to losing money. Second, volatility can eat into your portfolio returns over the long term, which makes it harder to build lasting, long-term wealth.
Combat volatility with diversification
A key factor for mitigating volatility in your portfolio is diversification, or investing your portfolio in multiple uncorrelated assets. Diversification can take a number of forms. For example, investors seek to diversify their stock holdings across multiple industries. Many investors find the easiest way to diversify is to purchase a mutual fund or an ETF, which gives them exposure to a broad swath of the market.
Diversification is also important across uncorrelated asset classes. Traditionally, the rule of thumb is to diversify across stocks and bonds. Traditionally, stocks and bonds have been inversely correlated, meaning that bond prices increase when stock prices decrease, and vice versa. For even more diversification, however, savvy investors are turning to alternative investments.
Alternative investments are a broad universe of asset classes which includes everything from stock options to real estate to gold to fine wine or a stamp collection. It’s hard to make generalizations about the characteristics of all alternative investments. However, they are a favorite of many experienced investors for several reasons.
First, alternatives are uncorrelated with stocks and bonds, so adding them to a portfolio increases diversification. Second, many alternative investments have much lower volatility than publicly traded assets such as stocks and bonds. Third, many alternative investments have met or exceeded the returns of the stock market, so adding alternatives can boost your overall returns. Finally, many alternatives offer the benefit of passive income on top of price appreciation.
Increase diversification with uncorrelated assets like farmland
One alternative investment that is uncorrelated to stocks and bonds is farmland. Farmland investing is a newer asset class to many individual investors. Historically, the lack of a transparent marketplace and other high barriers to entry made it challenging for anyone but industry insiders and large institutions to invest. However, farmland’s many attractive characteristics make it worth considering for your portfolio.
From a diversification perspective, farmland investing is attractive because farmland is uncorrelated with publicly traded assets and other popular alternatives. As can be seen from the chart below, farmland investments are uncorrelated with stocks, bonds, publicly traded REITs and private real estate. What that means for investors is that events that impact the price of the stock market, like changes in interest rates or exogenous shocks like the Covid-19 pandemic do not impact farmland investments.
Source: Introduction to Farmland White Paper
In part because it is not correlated to the stock market, farmland investing is a good choice for investors interested in hedging against a recession. In uncertain times, investors flock to real assets such as gold or farmland as a store of value. The value of farmland is supported by its scarcity and the essential role it plays in the global economy — at the end of the day, no matter how bad the economy gets, everyone needs to keep eating. This phenomenon is illustrated by the chart below. For example, between Q4 2007 and Q1 2009, the S&P plummeted by 46%. In contrast, the NCREIF farmland index was up 17%.
Farmland investing has several other benefits that make it worth considering as part of your portfolio. In addition to being uncorrelated with other major asset classes, farmland is also less volatile, which is good news for long-term investors. Most importantly, farmland delivers these benefits without sacrificing returns. Farmland delivered an average annual return of ~10% between 1992 and 2018, including income and price appreciation. On top of this, farmland gives investors the benefit of a periodic passive income stream from rent and crop payments.
All this to say that adding farmland to your portfolio can increase diversification, reduce overall portfolio volatility, and boost returns. Fortunately, technology-enabled investment platforms like FarmTogether are making farmland investing more accessible than ever. FarmTogether’s interdisciplinary team of professionals has more than 70 years of experience in agriculture, farmland, and real estate. FarmTogether's platform provides investors with a one-stop shop for viewing investments, reading diligence materials, signing legal documents, and monitoring their portfolios. The best news is that accredited investors can get started for as little as $15,000.
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.