Alternative investments are great ways to diversify your portfolio, lower volatility, and boost your overall returns. They have a low correlation to stocks and bonds, outperform other stable assets, and create profitable arbitrage opportunities for particularly savvy investors.
Farmland is a particularly favorable alternative investment due to its strong returns, long-term capital appreciation, and inflation hedging characteristics. If you’re looking for an easy, profitable way to invest in farmland, we recommend FarmTogether.
Alternative investments are investments in assets other than stocks, bonds, and cash. On an institutional level, alternative assets can include private equity, hedge funds, alternative credit, and real estate, though for individual investors, alternative assets look more like fine art, vintage cars, and rare wines.
On a global level, there were $10 trillion of alternative assets under management in 2016, a number that is expected to double to over $20 trillion by 2025. Alternative investments are a popular method of diversifying a portfolio, since they have a low correlation with traditional assets, and with other alternative assets, too.
Alternative investments hold higher potential returns than traditional assets, though because they have a very low correlation with those traditional assets, they tend to lower the overall risk profile of a portfolio while simultaneously boosting its returns. It’s not hard to see why they’ve become so popular in recent years.
Given their illiquidity, long investment horizons, minimum investment requirements, and unique risk-return profiles, alternative investments are generally most suitable for sophisticated, high-net-worth individuals.
Types Of Alternative Investments
If you were an institutional investor with billions of dollars at your disposal, you would often look to alternative investments like private equity, venture capital, alternative credit, and hedge funds as a way of boosting your returns. But as a retail investor, there are five major alternative investment categories to be aware of. Let’s look at each of them quickly here.
Commodities like gold have played a key role in investors’ portfolios for centuries. Gold specifically is perceived to be a strong hedge against inflation and a stable store of value when global markets are experiencing volatility, though as you’ll see below, this isn’t necessarily true. Other commodities like agricultural products and oil are popular commodity choices, too.
Cryptocurrencies like Bitcoin and Ethereum are some of the newest types of alternative investments available. New crypto marketplaces are still getting set up, and many new investors are coming on board, which makes for a very volatile investment landscape. You’ll definitely want to exercise caution before putting money into cryptocurrency.
With the arrival of companies like Masterworks, investing in art has become a whole lot easier—and more profitable. Between 2000-2018, blue-chip artwork outperformed the S&P 500 by more than 250%, and only declined 26% during the 2008 financial crisis, compared to a 58% decline in the S&P 500.
#4 Real Estate
Like gold, real estate has been a part of alternative investors’ portfolios for a very long time. Also like gold, real estate is viewed as an effective hedge against inflation. It has a low correlation with the stock market, and you can invest in real estate privately—by buying a property or piece of land—or publicly through real estate investment trusts (REITs).
Farmland is one of the least-explored and fastest-growing categories of alternative investments. Over the past twenty years, farmland has been less volatile than the stock market and commercial real estate, and unlike both of those asset classes, it’s posted positive returns every single year. I’ll discuss the merits of investing in farmland in more detail below and how it’s being made possible through FarmTogether.
5 Key Characteristics Of Alternative Investments
These five characteristics set alternative investments apart from traditional ones.
#1 Low Correlation To Traditional Assets
When people talk about diversification, they’re often talking about buying stocks across several industries as a hedge against industry-wide downturns. But what they’re overlooking is that the entire stock and bond markets are actually extremely highly correlated. So if you want your portfolio to be truly diversified, you need to start thinking outside the box. That’s where alternative investments come in.
|Farmland||Real Estate||Stocks||US Bonds||Gold|
Sources: NCREIF, S&P 500, Bloomberg
#2 High Return Potential
Alternative investments often yield higher returns than stocks and bonds. As the chart below shows, timberland, farmland and real estate all outperformed the S&P 500 over a 20-year period, with farmland yielding an annualized return twice as high as the S&P.
#3 Low Liquidity
By their very nature, alternative investments have fewer buyers and sellers than traditional investments, which means it can take more time for transactions to take place. The flip side of this is that lower liquidity also means lower volatility, which leads to more stable returns over time.
#4 Long Investment Horizons
Alternative assets tend to require longer investment horizons than stocks or bonds, spanning anywhere from 6 months to 5+ years. If you know you may need to liquidate your investment at a moment’s notice, alternative assets aren’t right for you.
#5 Unique Risk-Return Profiles
Since alternative investments are not as widely traded as traditional assets like the major stock markets, they’re more difficult to value. If you’re investing privately, such as in a piece of art, you may be the only person considering that investment, which makes it hard to benchmark it against comparable transactions.
However, it also means that there are arbitrage opportunities for savvy investors, which is why many of the wealthiest investors make a large amount of their money through alternative investments. Investment newsletters like Capitalist Exploits have built lucrative businesses by capitalizing on those arbitrage opportunities within alternative asset classes.
Our Recommendation: Farmland Investing
Every alternative asset comes with its own set of risks and potential rewards, and it’s the job of the investor to navigate those and make the most appropriate decision. Shrewd, long-term investors look to identify asset classes that are poised to outperform their peers before they go mainstream: that’s how they attain deep value and maximize returns.
We believe that farmland is one of the asset classes that will outperform its peers on a risk-adjusted basis over the next decade. Let’s look at a few benefits of farmland investing to see why.
Benefits Of Farmland Investing
There are a few key reasons that both major institutional investors and thousands of retail investors are pouring their funds into farmland. Here are just five:
#1 Inflation Hedging
The standard inflation hedge is gold, of course, since gold is an alternative investment outside of the stock and bond markets that tends to increase over time, counterbalancing inflation. However, gold is far from a perfect inflation hedge, mainly because it still follows the swings of the market: when a recession hits, consumers tend to stop buying expensive products made from gold, causing the price of gold to drop.
Farmland, on the other hand, does not swing with the market: whether the economy is booming or not, people need to eat, and for that they need farmland. And unlike gold, farmland produces positive cash flow while also experiencing capital appreciation, making it an even better hedge.
#2 Favorable Diversity
Farmland is negatively correlated with most traditional asset classes (stocks and bonds), and is only slightly correlated with commercial real estate. This creates portfolio stability during volatile markets, while enhancing risk-adjusted return.
Of course, your diversity depends on the type of farmland you invest in. Different crops offer different returns and carry different levels of exposure to market volatility. That aside, the core of your investment—the land itself—will generally continue to rise in value.
#3 Low Volatility
As the population of Earth continues to swell, our limited stock of farmland becomes even more valuable. And when both the land itself and the crops it produces become more valuable, farmland becomes a pretty impressive investment.
Of course, factors like weather, climate, tariffs, and geopolitics impact the profitability of farmland yields—but those factors have an extremely small impact on the value of the underlying land. This is why farmland is known as such a strong alternative asset: unlike most stable assets (think bonds, etc.), it offers capital appreciation, too.
|Max Annual Return||33.9%||19.4%||20.2%||32.4%||11.6%|
|Min Annual Return||2.0%||-5.2%||-17.0%||-37.0%||-2.0%|
|Years Of Loss (Negative Returns)||0||3||2||5||2|
Sources: NCREIF, S&P 500, Bloomberg
#4 Strong Returns
Since 1992, farmland has averaged 10% annual returns based on income and price appreciation. And that income isn’t only coming from crops: billboard rents, hunting leases, timber sales, and windmill leases offer additional sources of income for farms.
Modern technology and innovative agricultural practices enable farmers to produce higher yields with the same plots of land, so farmland returns are expected to continue to increase over the years to come.
#5 Capital Appreciation
The capital appreciation of farmland is a simple case of supply and demand: as Earth’s growing population rapidly increases the demand for food, and the supply of arable farmland slightly decreases due to climate change and legislation, the value of farmland will continue to increase.
Research from the Federal Reserve Bank of Chicago shows that the value of farmland in five of America’s most heavily agricultural states—Illinois, Indiana, Wisconsin, Michigan, and Iowa—has appreciated an average of 6.4% per year for more than 50 years.
Why Is Farmland Investing So Sustainable?
It’s not only farmland’s returns that have been attracting attention as of late: the inherent sustainability of investments in farmland has, too. Here are just three reasons why farmland is such a sustainable alternative investment.
#1 Invest In The Future
Farming has been around for thousands of years, and it will be around many years into the future, too. But it’s by no means a cheap endeavor: the capital expenditures are high, and there are plenty of unexpected expenses that come up along the way.
You can help smooth out the yield curve for farmers by allocating some of your portfolio toward farmland. By becoming a farmland investor, you’re enabling farmers to do what they do best: grow the delicious, healthy food that we all enjoy.
#2 Have A Voice
When you invest in farmland, you get a say in how agriculture works and what practices are being used. And when investors tell farmers they want things done in a sustainable way, those farmers listen. Farming as a whole has already become significantly more sustainable over the past few decades, and one leading reason for that is the number of institutional funds that have begun investing in farmland over the same span.
#3 Create Change
Even when they want to transition to sustainable agriculture, some farmers don’t have the means for it: that transition often means making fundamental changes to the operations of their farm, and those changes require capital.
So when you invest in farmland, you’re injecting capital that farms can use to make that transition. And because of the favorable risk-return profile of farmland, you’re rewarded for helping them do it.
The leader in sustainable farmland investing is FarmTogether, which has committed to having 100% of its acres meet the Leading Harvest Farmland Management Standard, which verifies that farmland is being sustainably managed through outcomes-based evidence and third-party audits.
Farmland Investing With FarmTogether
If you’re considering making an investment in farmland, we recommend doing it with FarmTogether. Aside from its strong commitment to sustainability, there are a few other reasons you’ll achieve higher returns by working with them:
#1 Expert Advice
One major advantage of working with FarmTogether is that they offer an excellent filter: rather than sifting through thousands of farmland opportunities yourself, FarmTogether does the hard work in the background and only presents its investors with the very best. Their team of experts employs an academic approach honed at some of the world’s top institutional funds, and their discipline and obsession with risk mitigation ensure the investments you see have been carefully selected to deliver top-quartile risk-adjusted returns.
#2 Easy To Invest
FarmTogether offers two easy options for investing in farmland:
- Crowdfunded: Accredited investors can join forces to invest in farmland vetted by FarmTogether’s team. Minimums start at $10,000, and deals offer annual liquidity windows for early exits.
- Sole Ownership: Individual investors seeking sole ownership can schedule a call with FarmTogether to discuss a fully customizable farmland deal. Minimums start at $1,000,000, and deals are eligible for 1031 exchanges.
FarmTogether takes care of all the details—including negotiating service agreements and selling the property at the end of the holding period—so you just need to invest your part and collect your returns.
#3 Full Transparency
When you invest with FarmTogether, you have full access to all due diligence documents, deal structures, project financials, operating agreements, private placement memoranda, subscription agreements, operating partner details, and more. FarmTogether also tests soil and crop production before confirming the deal, and confirms the property title, environmental compliance, and water rights and quality.
We believe that smart alternative investments should make up a piece of every sophisticated investor’s portfolio. They’re uncorrelated to stocks and bonds and hold high potential returns, making them a great option for both lowering risk and increasing expected returns.
Farmland is a reliable, profitable investment that gains value through capital appreciation and income, and doubles as a hedge against inflation. For anyone interested in investing in farmland, we highly recommend FarmTogether.