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Alternative investments, or alts, are really any investment option outside of stocks and bonds. As you can probably imagine, there are many.
Many financial advisors actually urge investors to have up to 20% of their portfolio be allocated to alts. Alternative investments provide investors with strong diversification.
A portfolio made up of stocks and bonds are at risk of significant loss in times of economic downturn. Portfolios built up of a number of asset classes fare much better.
So, what are some examples of alternative investments? These include options like farmland, art, collectibles, precious metals, wine, cryptocurrency and more.
Farmland and art are actually two of the most popular alternative investments available.
However, their differences as an investment heavily outnumber their similarities. In this article, we take a closer look at how farmland compares to art as an investment.
Which one provides more benefits? Which has better returns? And which is easier to invest in?
Farmland vs Artwork
Farmland and art are two of the most popular alternative investments available, and it's easy to see why.
Both of these assets provide an investor's portfolio with strong diversification as both have low correlation to the stock market. In other words, neither farmland or art follow the ups and downs of the market exactly.
Additionally, they both provide a natural hedge against inflation. Since they are both physical assets and have intrinsic value, they actually perform well during times of high inflation.
Perhaps most importantly, both of these asset classes have had strong performance over the years giving investors impressive returns. We'll take a closer look at returns below.
How To Invest
Both of these assets have historically been difficult to invest in. In fact, they were both often thought to be reserved for institutions and high net worth individuals.
With farmland, you can get started by purchasing a piece of property outright or buying shares on a farmland investing platform.
Similarly, with artwork, you can start in the same way by purchasing a piece of art or investing with a platform.
With both of these assets, this can be quite costly to buy an entire investment outright. Hence, the majority of people with these assets are high net worth individuals.
However, in today's environment of empowering everyday investors, there are more options than ever.
Returns
Farmland and art as an investment have both performed well, historically.
- According to AcreTrader, United States farmland has provided average returns of 12.2% per year since 2000
- On the other hand, contemporary art, according to Masterworks, has averaged a return of 13.8% since 1995
Compared to the S&P 500, which averages 8-11% per year, both farmland and artwork do quite well.
Of course these returns are dependent upon a number of factors. But as a whole, both farmland and artwork have outperformed the stock market.
This is why someone like Bill Gates has been building a collection of both farmland and artwork over the years.
Investment Strategy
When it comes to investment strategy, farmland and art are very different.
While both asset classes gain value through appreciation over time, farmland also provides immediate cash flow. Investors can earn gains through the sale of crops grown on the land. They can also rent the land to farmers and collect monthly rent payments.
Art, on the other hand, does not typically provide any sort of monthly cashflow. It is a non-yield bearing asset.
If you are looking for monthly cashflow, then farmland may be the better asset for you. However, on the other side of the coin, farmland also requires more of a time investment. With art, you simply purchase the piece and worry about storage and insurance.
But with farmland, you have to manage tenants, crop yields, and even the weather!
Risks
When considering the two asset classes, you must consider the unique risks associated with both.
With farmland, earnings can be impacted dramatically based on weather, commodity pricing, interest rates, and crop yields. Some of these risks can be mitigated by renting the land out to a farmer and collecting rent regardless of crop yields.
However, with this strategy, you run the risk of tenants not paying rent.
Art also has its own unique risks. These risks can be a bit more difficult to conceptualize. For example, the value of a piece of artwork is determined by a number of factors. One of these factors include social perception and what is on trend.
With artwork, investors also have to consider the storage and transportation of a piece of work.
Farmland vs Artwork: Final Thoughts
While both of these assets have had strong performance over the years, they also have a number of key differences.
Farmland offers investors monthly cashflow through the sale of crops or through renting the land. This also means a bit more management than an art investment.
Art investments, like farmland, gain value through appreciation over time. It should be noted that both of these asset classes are long term investments.
If you are interested in farmland or artwork as an investment be sure to check out these guides: