Need Portfolio Diversification? Let's Talk Farmland
One of the most fundamental bits of advice when it comes to investing is to create a diversified portfolio. What’s less clear-cut for many investors, however, is how to make the most out of their portfolio diversification efforts. Spreading out your allocation to stocks, bonds, and funds is one of the more straightforward ways to diversify, but it may not be enough. After all, each of these holdings are still tied to the stock market, meaning that you’re still exposed to market volatility.
True portfolio diversification means moving money outside the market as well. Doing so, however, can be a challenge for even the savviest investor. The sheer volume of investment opportunities can be overwhelming, and the risk/reward tradeoff isn’t always clear. If you’re looking for a clear-cut addition to your portfolio that can help diversify while also opening you up to new opportunities, then farmland is right for you. Here’s what you need to know about taking your portfolio diversification to the next level through farmland investing.
Why Portfolio Diversification Isn’t One-Size-Fits-All
Every portfolio is unique: what works for your investment strategy may not work for someone else’s, even if there’s still some significant overlap in terms of holdings. That’s why diversifying your portfolio is inherently unique to your own needs. These needs could include your overall investment goals, such as retirement, buying a home, or paying for higher education. Yet most diversification tactics only consider a small assortment of options.
Your basic portfolio diversification strategy usually hinges on a few core concepts. These include spreading your portfolio across multiple industries and market sectors, holding different kinds of stocks and equities, a mix of domestic and international stocks, and a range of time-tied holdings (such as long-term or short-term positions in a stock). Most diversification strategies also include some blend of mutual funds and bonds in order to offset the potential ramifications of market volatility.
One thing each of these holdings have in common is that they’re all tied into stock markets. Although a diversified portfolio with plenty of different market assets can help maximize upside and mitigate risk, this strategy may not protect against a bear market, inflation, a global economic slowdown, or macroeconomic trends that pull down the value of the overall market.
If you want to offset the risk of a broader market downturn, you can to turn to alternative investments for a true hedge. Alternatives can provide you with a strategic opportunity to pull funds out of the stock market and into different asset classes that may not fluctuate with overall market trends. Better still, some of these alternatives may even move in the opposite direction of the markets altogether.
How Alternatives Factor into a Diversified Portfolio
Alternatives are a broad category made up of non-market assets. These can be anything from commodities like precious metals and agricultural products to collectibles and artwork. Most alternative investments take the form of gold, silver, real estate, and commodities, however. Experts say that a well-balanced portfolio should include between 10 to 12 percent of its value in alternative assets.
With these and other alternatives, you’re putting your money into something different than shares of common stock or mutual fund holdings. In some cases, your alternative investment may be physical in nature—such as real estate, artwork, or rare coins. In other cases, your alternative investment is more akin to owning shares as you would with publicly traded assets (such as real estate investment trusts, or REITs for short). The premise behind each alternative investment is the same, though: an investment in something of value that appreciates or depreciates that sits in parallel to stock markets.
One of the key differentiators here is how alternatives work outside of markets, or in other kinds of exchanges. The value of real estate, for example, isn’t dependent on a stock price. Each property has its own perceived value based on factors that don’t necessarily move because markets do.
Precious metals and commodities, however, do fluctuate within their own exchanges. These markets sit alongside global stock markets, though. In many cases, the price of these goods changes depending on factors such as scarcity or demand. In other words, a low-growth stock market doesn’t inherently drag down the price of gold on its own. In fact, the opposite is often likely to happen (more on that below).
Why Farmland Investing Can Be An Ideal Alternative for Portfolio Diversification
Real estate, gold, and commodities may get the lion’s share of attention within the world of alternative investments, but they’re by no means the only (or best) alternatives for portfolio diversification. That title may very well go to farmland investing for a variety of reasons.
First, farmland investing combines some of the best opportunities for upside seen in other alternative assets. For example, farmland investing is a real estate opportunity—the value of the land has a direct impact on your potential return. Plus, the value of farmland is historically steady and has even appreciated during shaky economic times. According to the USDA, the average value of farmland was $2,532 per acre in 2010. By 2020, this figure grew to $3,160.
Farmland investing also gives you access to the commodities market by way of the money made when goods are sold after harvest. Instead of buying agricultural futures, you can reap a portion of the proceeds of the goods sold from the farmland you’ve invested in. And as far as other popular commodities go—such as gold and silver—you can make your money stretch further through farmland investing. Gold and silver are trading at near-record prices, meaning that your cost of entry is much higher (and your potential returns slimmer).
The Bottom Line on Diversifying Your Portfolio through Farmland
There are plenty of options when you’re looking to increase your portfolio diversification, but none of them are quite alike. Finding the right option for you means sizing up the opportunity each investment presents and evaluating how it fits in within your broader array of assets. If you’re looking to incorporate alternative investments—and you certainly should be—then farmland investing can be a great option. With farmland investing, you’ll get exposure to real estate, commodities, and an inflation-resistant holding that can weather market volatility.
Interested in learning more about farmland as an investment opportunity? Check out our article that breaks down how investing with FarmTogether works.
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.