The following is a guest post from FarmTogether on alternative investments. FarmTogether is a leading farmland investing platform to help you diversify your portfolio.
I currently have about 10% of my net worth in alternative investments such as private equity, venture debt, venture capital, and real estate crowdfunding. My goal is to bring my allocation up to about 15% over the next three years.
Conventional investments are the bedrock of just about any financial portfolio. However, those who are seeking higher yields on their investments may be dissatisfied by merely keeping pace with the market by way of a mix of stocks, bonds, and cash. For potentially higher real returns, consider alternative investments.
The world of alternative investments is broad: some investments are riskier than others, and some more popular than other options. Understanding the unique differences of each alternative investment can help ensure you know exactly what your options are, and how to develop a diversified portfolio that’s right for you.
What Are Alternative Investments?
The term “alternative investments” is fairly broad. Essentially, they are investments that aren’t bonds, cash, or stocks; these are the more common investment opportunities marketed to individuals.
Common alternative investments include hedge funds, commodities, real property, and tangible assets.
Investing in a private equity firm is another example of an alternative investment, as you’re not handing money over to a mutual fund manager that then allocates funding across a variety of conventional investments.
One of the main benefits of alternative investing is that not all alternatives are directly tied to the ups and downs of the stock market.
The investment value in real property, for example, doesn’t fluctuate with stock prices. Rather, it is determined by a host of factors, including demographic trends and interest rates that tend to fall during times of uncertainty.
Other alternative investments, such as farmland investing, will appreciate in value depending on other variables, such as land value and consumer demand for products grown on the farms within your portfolio.
What Makes Alternative Investments Different?
Alternative investments are different for a host of reasons. Unlike traditional investments, alternative investments aren’t traded on public stock markets. You won’t be able to ascertain the value of an alternative investment like you could with a stock price, as these investments aren’t listed on exchanges.
Rather, you would reach out to the individual (or team) who manages the investment opportunity—for example, the portfolio manager at a hedge fund—for this information.
Alternative investments have a different relationship with the markets than their conventional counterparts. According to the CFA Institute, these investments may perform well even when the overall market is bullish, or vice versa.
For example, private equity has outperformed public equity in U.S. state pensions for 15 years, to the tune of 489 basis points higher than the S&P 500 index. This is one of several reasons why alternative investments can help round out a portfolio and hedge against market losses.
Alternative Investments Are Less Liquid
The ways in which alternative investments are valued also differs from conventional holdings. The illiquid nature of most alternatives makes it more difficult to get a solid valuation that’s as clearly defined as a stock or bond. That doesn’t mean these investments are lesser in value or more volatile, however. It’s merely more challenging to get a real-time assessment of their appreciation or depreciation.
Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc., due to a limited number of buyers.
Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist as of 2018.
No Daily Price Movement
Since alternative investments are removed from daily market movements, their value can either increase or decrease independently from what’s happening on the stock exchange. If you’re someone who doesn’t like the stress of daily price fluctuations, alternative investments may be more appealing.
In fact, it’s not uncommon for many alternatives to increase in value in spite of (or even because of) economic factors that weigh down the markets. Having investments that don’t ebb and flow with Wall Street can help create a more robust and diversified portfolio.
For example, real estate investments tend to increase in value during inflationary periods, as rent and value increases. Commodities, such as corn and livestock, also tend to rise in value with inflation, as these goods end up selling for more money than they would when currency values are stable.
Why Alternative Investments?
The main reason to own alternative investments is for diversification purposes. Alternative investments can help you take advantage of growth opportunities when times are good and soften the economic blow when times are bad.
The Various Types Of Alternative Investments
Let’s take a look at the various types of alternative investments. Each investment is going to have different upsides and drawbacks, typically tied to their risk factor.
Farmland investing is at the vanguard of alternative investments for savvy investors looking to diversify their portfolio. Farm real estate is worth $2.6 trillion out of the $3.1 trillion in assets across the agricultural sector writ large in the United States.
Investments in farmland tend to provide steady, stable returns that appreciate without being tied to market trends. For example, from 2015 to 2019, farmland real estate values increased by 14.5 percent in the Pacific region and 6.6 percent in the southern plains.
Moreover, even during adverse market conditions, like we’re facing in the present day, farmland has proven to be a relatively stable investment. The NCREIF has not reported a negative year in almost two decades.
No investment offers a hedge against inflation like farmland, not even the most popular one – gold. Even in years when every other asset saw losses, such as, for example, the 2008-2009 financial recession, the farmland index was up 20%.
One of the other unique aspects of farmland investing is its triple revenue sources: land appreciation, rental income, and crop yield.
First, your profit margin grows gradually over time as the land itself increases in value. Second, the crop yield from the farm can also bring in passive income, with a portion going to investors after harvest. Third, you earn returns from standard farm operations and lease payments.
For more on farmland investing, here is the definitive guide to farmland investing previously published on Financial Samurai.
Private Company Equity
Taking an equity stake in a private company offers investors an intimate opportunity to invest in a promising business. But investing in a winning private business is not easy. Most businesses do fail after five years or go nowhere.
Investing in a private company means making decisions with less data available than with a public company. Plus, there’s less of a guarantee that their financial statements are 100% accurate.
Make sure to be thorough if taking an equity stake in a private company has a place in your investment portfolio. It is difficult to become a successful private company equity investor.
Private Equity, Venture Capital, and Hedge Funds
Each of these opportunities have similarities between them: they are all designed to provide accredited investors with an opportunity to turn a profit from alternative investments. The funds are run by experienced investment professionals.
Private equity firms pool together investor resources to acquire businesses for a short period of time, typically to make operations more profitable.
Venture capital does the same, but retains its positions in a company for the long haul.
Hedge funds are a mix of both venture capital and private equity, as they provide entry into other alternative investments but with a layer of expertise (and risk mitigation) added into the mix.
These options are all conventional alternative investment plays, each with its own advantages and disadvantages. Private equity and venture capital come with a significant amount of risk: if an acquisition goes bust, investors are exposed to losses.
Hedge funds diminish exposure, but cannot mitigate it entirely. In most cases, all three of these options have a high cost of entry for investors as well.
Real estate investing is one of the most tried and true alternative investments around. It’s a wonder that real estate investing is still categorized as an alternative investment.
Individuals or groups purchase real estate and share a portion of the profits from ownership—be it from rental income, sale, or other sources of income that result from owning the property (or properties).
Returns on real estate investing vary significantly based on what you invest in, where your investment is, and overall market conditions for both your property and, if you’re investing in commercial real estate, the financial viability of your tenant.
Investing in a REIT will take many of these considerations out of your personal investing calculus, and offer steady recurring revenue when performance is up.
Real estate investing can be an excellent opportunity for diversification, but also comes with risk. For example, nobody in the office commercial real estate market could have forecasted a pandemic shutting down many office buildings for over six months.
From a real estate perspective, farmland investing offers a similar opportunity. However, the farmland real estate market is conventionally less volatile than other real estate opportunities.
Commodities are one of the other staples of the alternative investment world. Commodities are tangible assets—be they metals, grain, livestock, coffee, or other goods. Buying commodities has more in common with traditional stock market investing, as buyers can either purchase commodities on the stock market, or futures and options as well.
Gold is one of the most common examples of a commodity that gets plenty of attention as an alternative investment. The precious metal is often seen as an investment opportunity during periods of market volatility.
Gold has outperformed the DJIA recently. However, the overall trend shows the DJIA significantly outperforming gold over the longer term. Gold is often seen as a play on inflation and economic uncertainty.
How Farmland Fits In Your Alternative Investing Strategy
Alternative investing offers a world of potential, but can be hard to navigate because of all of the options available. Plus, you’ll want to find alternative investments that can maximize returns while leaving you less exposed to potential downsides and lost value.
Farmland provides alternative investors with a relatively stable, long-term investing opportunity. FarmTogether’s investments are vetted by a team of experts, and are designed to mitigate risk.
Investing with FarmTogether means not having to scour through a seemingly endless number of opportunities just to find those that have the best opportunity to deliver dividends. Instead, you can rest easy when you decide to invest, knowing that there’s a team of experts alongside you.
Plus, FarmTogether offers an opportunity to provide investors with a passive income stream, which puts your money to work for you in real-time.
FarmTogether proves a viable option for risk-averse investors. One of the most sought after characteristics is that this industry is inflation-resistant and contra-cyclical to many conventional equity investments. However, what many investors appreciate most is that farmland is a “real” asset that will always maintain a level of tangible, intrinsic worth.
FarmTogether offers a plethora of investment opportunities designed to meet your portfolio diversification needs. And, unlike other alternatives, farmland investing has a lower cost of entry, with investments starting as low at $10,000. Whether you’re new to alternative investing or merely want a new diversification opportunity, FarmTogether has a solution for you.
Sign-up today and start investing! Or, learn more by visiting FarmTogether.com
Rupen Shah says
Interesting post. This goes beyond the usual diversified portfolio of index funds. Question for me with alternative investments though has always been the cost of entry and their liquidity. any thoughts on that?
Sam – Generally speaking how much of a portfolio would you recommend to REITS such as the Vanguard REIT Index Fund? This appears to be an excellent fund that is low costs and provides a building cash flow stream.
Financial Samurai says
It depends on your physical real estate holdings. I think a good goal is to keep real estate to no more than 40% of your net worth.
Papa Foxtrot says
Are investments with FarmTogether tax-deductible? I know the USDA pretty much deduces everything that is related to agriculture including seeds and tools.
Financial Samurai says
I don’t believe so. However, the farmland operator has tax-deductible expenses, which the investor ultimately benefits from.
Hi Sam! I love you post. It provides a good insight on alternative investments and importance of portfolio diversification. I think you might also be interested in the article by Shailesh Dash earlier this year. He is a well known Entrepreneur in the MENA region who has more than 20 years of experience in alternative investments and might also give you a few ideas with regards to the subject matter and other investing ways we need to look at to adjust to the current times. Going back to the article he calls on to go back to basics and start aggressively investing in agriculture, clean water and food processing which also goes in hand with FarmTogether Investments. Just have look and let me know what you think.
Sam…Any thoughts (or maybe a separate post?) On bitcoin as an alt investing class, or crypto in general?
Financial Samurai says
Maybe one day, just not today. Perhaps a guest post by a veteran investor would be best.
+1 on understanding how would climate change impact the investment particularly given the long horizon of 10+ year?
Sam: Also curious if you have invested in any of farmland’s offerings? If so (or if not), what were your main drivers to take a plunge (or not)?
Financial Samurai says
It’s so hard to predict climate change. I’ll ask the FT people their thoughts and respond.
Yes, my plan is to diversify into farmland as well. I like long-term alternative investments I can shelve away and not think about for years.
I actually just did an analysis of my latest passive income streams and the alternative investment returns have been really strong this year. These were investments made years ago: https://www.financialsamurai.com/the-splinter-in-my-thumb-september-2020-recap/
Philly Special says
Hi Sam! Love your posts and I have been following your blog for a while. Great advice with no bias. Investing with FarmTogether sounds interesting. Any thoughts on climate change, fires on the West Coast and companies like AppHarvest coming on the horizon that may impact alternative investments in farming?
Can you share your thoughts on climate change and how it positively or negatively can affect farmland investing? I was reading somewhere about how the hotter the earth gets, the lower the yield.
How does an investor take into account climate change when selecting an investment? How does the farm together investment committee take into consideration climate change?
Thanks for the informative post. I have a small alternative investment allocation in my overall portfolio. I didn’t invest in anything except stocks and ETFs for my 20s and then slowly introduced a little bit of alternative investments in my 30s. I still don’t own any exposure to farmland but this post makes a good case for it. Thanks!
Good post, Sam. What do you think of the unlisted companies that are involved in creating remote workplace employee management solutions? One of these companies is currently in the middle of pre IPO funding and is collecting cash at a fast pace. Crazy valuations, though!
Financial Samurai says
Can you list some examples? I’m not familiar. thx