What Exactly Is Appreciation?
Every investor wants to make money on their holdings, whether that’s in the short-term or long-term. A good investment is one that increases in value, whether or not you plan to sell it. This increase in value is also known as appreciation: the more your investment appreciates over time, the better it performs. That means more money in your pocket, for a long-term savings goal, or additional capital to reinvest in your portfolio.
Appreciation may sound deceptively simple. How, when, and why assets appreciate (or depreciate), however, differs across the board, meaning each has its own impact on your portfolio.
Here’s what you need to know about appreciation, capital gains, and the best investments for appreciation over time.
What Does Appreciation Mean?
In investing parlance, appreciation is the increase in an asset's value over time. For example, a certificate of deposit (CD) offers interest over time. This is reflected as a percentage of the money you put into the CD, and gets paid out with the original amount you put into the CD when the account matures. Stock ownership is another good example. If you buy a stock at a $15 share price and its share price increases to $20, your investment has appreciated by $5. In this example the amount of appreciation depends on when you sell the asset, since share prices fluctuate. When talking about investments, this is known as capital appreciation.
The opposite of appreciation is depreciation. When an asset depreciates, it loses value. Most people own at least one depreciating asset: a car. Most cars (leaving out rare or exotic vehicles) depreciate in value over time. Mileage creeps up, maintenance becomes more necessary, and new models enter the market. Other investments and assets can depreciate as well—be they stocks that have lost value or investments that have gone belly-up. In the world of investing, this is known as capital depreciation.
Calculating Appreciation and Depreciation
Although some investments may be less predictable than others, capital appreciation or depreciation can be forecasted to a certain extent. This calculation is known as an investment’s appreciation rate. Appreciation rates change depending on the underlying asset. If, for example, you purchase a stock that pays an annual dividend, you can calculate your expected appreciation rate based on its current performance.
Depreciation can be a little trickier, particularly if you’re trying to anticipate depreciation on a real asset like a car or real estate. The simplest way to calculate depreciation is to take its cost, less its salvage value, divided by the depreciation rate by year. This is easier to calculate for some investments than others: it’s easy to anticipate a real asset’s depreciation rate than it is for a stock or equity investment.
Even if you don’t dive into the details of appreciation rates for your investments, it’s helpful to have a sense of what to expect if you include them in your portfolio. The better you can anticipate asset appreciation, the better you can forecast what your investments will do for you.
The Correlation Between Appreciation and Capital Gains
Appreciation is the amount of money your investment is worth now versus when you first bought the asset. The value is theoretical for as long as you hold onto your investment—you haven’t cashed out; thus, you haven’t actually received these expected gains. Once you do, however, you’ve entered the world of capital gains.
Capital gains refers to the amount of money you’ve made on an investment that you’ve withdrawn from. If you sell a stock worth $20 per share that you bought for $10 a share a year ago, you’ve made $10 in capital gains. Depending on what you do with the money, you may have to pay income tax on capital gains, since the value of your investment turned into cash.
It’s important to know the difference between appreciation and capital gains not only because of their own tax implications, but because you’ll also want to know how long it will take for one asset to appreciate versus another. If you’re investing for short-term returns, you’ll want to consider assets that appreciate quickly. If you’re more interested in a long-term investment, you may want to opt for a steadily appreciating asset to help you generate the returns you’re looking for.
How Appreciation Impacts Your Portfolio
Appreciation is one of the major metrics of your portfolio’s success. The more your assets appreciate, the more they’re worth. This is a simple way of looking at portfolio performance and how appreciation factors in, of course, but it’s a fundamental way to approach your investment decisions at a high level.
Most investors want a blend of assets that generate short- and long-term appreciation. Stocks, for example, can increase in value quickly—this is good for investors who can stomach risk (or have time to recover potential losses).
Other assets increase in value steadily over a longer period of time. These investments serve as a hedge against stock market volatility and can generate returns consistently. Farmland investing is among these steady appreciators that have historically low exposure to the ups and downs of the market, meaning it can be a strong contender in terms of long-term holds with strong appreciation.
Finding Assets with High Historical Appreciation
Assets all appreciate (or depreciate) differently, be it due to unique factors like a company’s performance or due to broader causes, such as industry demand. This is all to say that investors are on the hunt for assets with a good track record of appreciation whether they’re buy-and-hold assets or those designed for the short-term.
Stocks, bonds, and alternative investments are just three categories of assets that appreciate in their own ways. Dividend-paying stocks are well-known for their steady performance over time, most with high historical appreciation over the long term. Treasury bonds come with built-in appreciation in the form of set interest rates. Some alternative investments, like farmland investing, come with anticipated rates of return that can offer steady appreciation over a target hold period.
What makes farmland investing unique in terms of capital appreciation and your broader portfolio is that it offers three different forms of value generation. First is the steady farmland value appreciation we’ve seen since the 1990s. Farmland prices have risen per decade and continue to show signs of growth. This means your investment in farmland is likely well-suited to grow in value over time.
The Dow Jones Industrial Average and S&P 500 returns have grown over time, just as farmland has. The difference between the three being that the two stock indices experienced much more fluctuation per year and don’t encompass every stock. Both indices are merely representative of overall trends, rather than specific indicators of how well your own portfolio has performed. Your own stock holdings may not perform as well.
This is just one of farmland’s three main value drivers. The second is rental income: when you invest with FarmTogether, you’re tapping into recurring passive income by way of the rent operators pay to investors. Depending on the deal structure, you may be entitled to a portion of these rental payments corresponding to your stake in the property, among other factors. Last but not least is the value of the crops sold: when the farm you invest in turns a profit from its crops, you receive a portion of that income.
While there are a variety of options in terms of investments with historical appreciation, farmland is among the best long-term investments for appreciation. Better still, it can help generate income in the short-term as well, giving it a leg up on other long-term investments.
Going Beyond Appreciation with FarmTogether
A successful portfolio should include a variety of appreciating assets. After all, you’re investing to see your money grow. The assets you include will vary in terms of upside and appreciation, though, which means it’s critical to find the best options to help you generate strong returns. A good mix of appreciating assets for the immediate and long-term can position you for growth; but it’s important to pick the right options to make your investment dollar go as far as possible.
Farmland can be an excellent option as far as long-term appreciation goes. This asset class has long been a steady revenue generator, even though it has been out of reach for the majority of individual investors due to cost. Now, through FarmTogether, you can incorporate farmland into your portfolio through fractional ownership. This allows you to customize the amount of farmland you want to include in your portfolio and choose from a broader range of investment options, such as annual rate of return or target hold period.
Institutional investors have long benefited from farmland investing. Now you can, too.
Interested in learning more about farmland as an asset class? Click here to read our FAQ or get started by visiting ways to invest.
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.