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October 5, 2021

Farmland Investing For Portfolio Diversification

One of the many tidbits you’ll hear as you venture into the world of investing is making sure that you have a diverse portfolio. After the last financial crisis on September 29th, 2008, people realized they needed to have more in their portfolios besides the typical stocks and bonds.

Some people switched to investing in commodities like gold and silver or some mutual funds in emerging markets. However, you’ll still be exposed to some market volatility. 

To have a truly diverse portfolio means having investments outside the traditional market, which is why you should invest in farmland. You’ll be able to diversify your portfolio and land new investment opportunities.

Are you interested? Then continue reading to learn more about how farmland investing can increase the quality of your portfolio.

Importance of Portfolio Diversification

When creating a diverse portfolio, what’s the first thing that comes to mind? We’re going to assume you’re thinking about your gains and losses. However, that isn’t the only thing investors focus on.

They also focus on the level of risk for which they are comfortable. Diversifying your portfolio means having your hands in different securities, like stock, bonds, and commodities, but the amount that you lose or gain from each can vary by the day,

However, if you have a security that can balance your portfolio, like farmland, you can minimize the losses from lousy trading days. Farmland investments do not correlate with the stock market trends, unlike other securities, which are dependent on low correlation to have success.

Farmland For Portfolio Diversification

So, do you want to add farmland to your investment portfolio? That’s a significant step to ensure financial security. It’ll also help open your portfolio to a number of different markets. But before you do, it’s essential to understand why investing in farmland is so attractive to many investors. 

Total Returns

Over the last 20 years, farmland has performed well against other assets such as real estate, stocks, and bonds, returning about 12% on initial investments made over that period. Anything that yields double-digit returns is something that should get any investor’s attention.

Also, farming operations and crops have steadily provided income returns for investors as commodity prices have increased. Due to their consistent increase over the last 20 years, permanent crops like fruits and nuts have an average of 14% gross annual return.

To put it into perspective, most stocks that trade on the S&P 500 Index have annual returns of around 10%. This has been the steady outcome since the 1920s, meaning that having an asset that returns above the average can do wonders for your portfolio. But there are more benefits of farmland investing.

Protection From Inflation

Unfortunately, when you’re investing in stocks and other securities, you have to deal with the impending doom of inflation. Recently, inflation hasn’t been something to worry too much about. However, due to the pandemic, many fear that we’re in for a rise in inflation over the next few years.

Many investors look for securities that can “hedge” or offset those high prices to combat inflation, which is where farmland investing can help. Since returns are high and there’s no correlation with other stocks, farmland investing can protect you from inflation.

Farmland generates the commodities that rise during periods of inflation. As a result, it increases cash flow and raises the land value where crops are produced. So even in a time of “crisis,” you’ll still be rewarded. It’s a win-win.

Why Portfolio Diversification Isn’t One-Size-Fits-All

When diversifying your portfolio, its important to know what your aim is. You’re going to learn different investment tactics as you grow as an investor, but your core strategy should be centered around your interests.

See which securities stand out to you. The aim should be to spread your portfolio across domestic and international markets, with a mixture of stock, bonds, and mutual funds to maintain stability while you’re trading.

However, it’s important to remember that all of these assets are tied to the stock market, meaning that they aren’t protected from:

  • Global economic shutdown
  • Inflation
  • Bear market

But there is a way to offset any stock market losses. By putting money into alternative investments like farmland, you’ll have assets that won’t be affected by current market trends during periods of downtime.

Factoring Alternatives Into A Diversified Portfolio

Having alternative investments in your portfolio gives you access to a broader range of assets that aren’t on the stock market, such as:

  • Commodities - Gold, Silver
  • Real Estate
  • Agriculture

It’s different than putting money into stock market securities. With alternative investments, sometimes your holdings are physical, in the case of real estate. They won’t be subject to stock market prices since they do not correlate with that market.

Real estate prices are subject to a completely different market, where property prices are dependent on area inflation, crime rates, school districts, and environmental sustainability. However, there are some alternatives that do fluctuate within their own markets.

Precious metals like gold and silver sit along with global markets and are subject to price changes depending on their availability and demand. However, even if there is limited growth potential, a single factor won’t hinder the overall cost of the asset.

Do you want to increase the diversity of your portfolio? Learn how you can with farmland investing tips from Land Income!

Farmland Investing As An Ideal Alternative To Diversify Your Portfolio

Real estate, commodities, and metals get most of the attention when it comes to diversifying your portfolio. However, they aren’t the only assets that you can invest in to further diversify holdings. Another great option is farmland investing.

As we’ve already mentioned above, when you invest in farmland, there are more opportunities to return on your investments, and you’re protected from inflation during market volatility. Also, farmland is steadily increasing, with the average price per acre in 2021 costing $3,160.

Investing in farmland gives you further access to the commodities market through your harvested goods. When your crops are sold, you can gain some of the profits. So you won’t have to worry about investing in agricultural shares in other markets.

Risk-Adjusted Returns

Not only do you not have to worry about the lack of exposure to other markets when you invest in farmland, but it also provides the opportunity for risk-adjusted returns.

Any seasoned investor is looking for assets that provide the highest return with the lowest risk. However, it’s equally crucial to make sure that any long-term investments will perform well even throughout periods of volatility.

No investor wants to see their portfolio make significant gains one day and then drop suddenly the next. Ensure that you look for opportunities that provide risk-adjusted returns to provide stability for your assets as you’re building your investment portfolio.

The Sharpe Ratio

If you want to get even deeper into risk-adjusted returns, you should learn about the Sharpe Ratio. It measures the return of an investment and the risk-free rate by the standard deviation of the investment. So the higher the Sharpe Ratio, the higher the risk-adjusted returns will be.

For example, let’s say you have two assets; A and B.

  • Asset A returned 10% throughout the past year with a standard deviation of 4%
  • Asset B returned 13% with a standard deviation of 6%
  • The risk-free rate throughout this period was 2%

Sharp Ratio:

  • Asset A: (10% - 2%) / 4% = 2
  • Asset B: (13% - 2%) / 6% = 1.83

So as you can see, even though Asset B returned higher throughout the year, Asset A had a higher risk-adjusted return, meaning that it would be the better security to add to help further balance out your portfolio.

Related: Why Invest Now?

Diversify Your Portfolio With Farmland Investing

We’ve spoken about the importance of farmland investing and how it’s essential for your portfolio growth. It helps mitigate potential risk from market volatility and allows you to tap into other markets in a sector that isn’t correlated to the stock market.

All of the benefits of investing in farmland may seem too good to be true. You’re an investor, so some skepticism is necessary. However, if you want to invest in cropland the right way, look no further than Crawford Park Farming AG.

Our mission is to provide you with farmland investment opportunities in various locations near quality water sources. With the additions of our state-of-the-art technology, we can improve the value of that specific area. 

As a result, you’ll have successful crops with high returns and facilitate a successful financial future.

Are you interested in learning more about farmland investing? Then contact Crawford Park Farming AG today.

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