Investment opportunities come in many shapes and sizes. And in today’s modern era of technology, the investment options available to investors are more vast than ever before.
The types of investments available can be categorized in thousands of ways. But perhaps this is the most simple categorization: alternative vs traditional investments.
Traditional assets, or non-physical assets, typically represent ownership or legal title to the profits of a company or government. For this reason, they are often referred to as financial investments. These investments cannot be touched and inspected the way physical assets can be. They also have no intrinsic value. However, financial assets are typically more liquid than real assets. Common examples include stocks, bonds, and ETFs.
Alternative investments, on the other hand, are assets that are not stocks, bonds, or cash. The most common types of alternative investments include private equity, hedge funds, venture capital, collectibles, and real assets.
For the sake of this article, we will focus on the latter: real assets. Unlike financial investments, they have intrinsic value. They can be seen and felt.
So, which is better? Given that each has unique characteristics and considerations, they actually both deserve a place in your portfolio. Let’s dive in and take a closer look at alternative and financial investments and how each might benefit your portfolio.
This article is sponsored by FarmTogether, an affiliate partner of Farmland Riches.
Alternative vs Financial Investments
Each and every investment available comes with its own set of pros and cons. When it comes to real and financial investments, this is certainly the case.
While both of these investments share a common goal to grow wealth, they have drastically different strategies, risks, and opportunities.
Real Assets 101
When considering an investment in real assets there are a few key characteristics that may benefit investors.
1. Real Returns
Real asset returns are ultimately derived from their real-world qualities, such as food and shelter, which allows these assets to preserve their value.
After all, everyone needs to heat their homes, regardless of the economic environment. Moreover, investors can rent the land or grow crops, for example, which can provide reliable and steady passive income streams for investors.
2. Appreciation Potential
Driven by stable supply-demand dynamics, many real assets have traditionally experienced appreciated values over time, offering investors long-term growth potential.
On the flip side, however, some real assets can experience depreciation. Over time, certain assets will require maintenance and repair costs.
Depreciation is also one of the reasons why land investments are so coveted – depreciation can provide investors with a massive tax advantage.
Historically, real asset returns have benefitted from rising inflation.
This is because real assets produce commodities, such as energy or grain, which tend to move in lockstep with inflation indices like the Consumer Price Index (CPI). When the price of food goes up, for example, so too should the value of the land that produces it.
Another key benefit of real assets is that their value does not experience nearly the same level of volatility as the stock market. External factors that drive market uncertainty up, and therefore the stock market down, simply do not have the same impact on many real asset investments.
As a result, these assets have been historically uncorrelated to traditional investments, as well as to each other, providing investors with welcome diversification.
When considering an investment in a real asset, one ought to think about liquidity, or the ability to quickly sell an asset.
With real assets, such as farmland, this can often be more difficult than selling shares of a company on a major stock exchange.
While buyers and sellers certainly exist for real assets, it may take longer to identify and close on a deal.
6. High Barrier To Entry
Part of the reason for the reduced liquidity is the high barrier to entry.
For someone to purchase a real asset, they often need a significant amount of capital. This initial investment is the reason many investors do not have real assets in their portfolio.
Real Asset Pros
- Low correlation to the stock market/low volatility
- Steady appreciation
- Historically consistent returns
- Tax benefits
- Intrinsic Value (Less likely to be worthless than financial assets)
Real Asset Cons
- High initial cost
- Significant time investment to close deal
- Maintenance and repair costs
Financial Assets 101
Stocks and bonds are the most commonly held investment by investors for a number of reasons. First, they are typically highly liquid, meaning an investor can cash out the investment quickly if needed.
Second, they are relatively easy to buy and sell. Of course, an investor should conduct research to determine which stocks to purchase, but once an investment is chosen, they can execute a transaction in a matter of seconds.
On the other hand, investments in land can require significant time to actually close. And while these real assets also require maintenance and repairs, financial assets do not.
This ease of transacting is also a negative. With so many factors impacting the market, panic selling and hype buying are far too common.
Financial Asset Pros
- High liquidation
- Easy to transact
- Nearly zero maintenance
Financial Assets Cons
- High volatility
- No intrinsic value
Which Is Right For You?
This question certainly comes down to what your goals are, though both real and financial assets can have a place in your portfolio.
In fact, a portfolio made up of only financial assets is much more susceptible to loss than a portfolio with a healthy mix of alternatives, like real assets. This is due to the fact that financial assets are tied to the stock market, while many real assets are not.
Over the last 20 years, the S&P 500 has had a standard deviation of 16.9% vs farmland at 6.8%.
Diversification within the stock market is certainly important. But diversifying across multiple asset classes is perhaps even more critical to building a strong, well-rounded portfolio.
The problem is that finding a real asset investment can be very tough, especially if you are lacking a deep understanding of the industry you are interested in. And when you find that investment, it can often require significant capital as well as time.
Farmland, for example, is one of the most coveted real asset investments available and has been growing in popularity over the last few years. This popularity is driven by the fact that over the last 30 years, farmland as an asset class has actually outperformed the S&P 500 in terms of both volatility and average annual returns.
This is great, but investing in farmland can be incredibly difficult. Finding top-notch land, hiring an operator, distributing crops, managing yields, and building efficiencies is a serious undertaking.
FarmTogether, a farmland investment manager founded in 2017, is one platform enabling greater access to top-notch farmland opportunities across the US, while nearly reducing those three cons to zero.
What Is FarmTogether?
In the past, investments in farmland have been reserved for institutions and the top 1%.
FarmTogether aims to make investing in institutional-quality US farmland more accessible by enabling accredited investors to purchase U.S. farmland through a variety of channels, including crowdfunded farmland offerings, 1031 exchange, sole ownership bespoke offerings, and their Sustainable Farmland Fund.
They handle it all – from sourcing and risk management to operations and distributions – to remove the barriers to entry that would otherwise turn investors away if they tried to do it all themselves.
Using FarmTogether’s all-in-one investment platform, investors can enjoy top-tier institutional-quality farmland offerings and a hassle-free fully digital investment experience.
FarmTogether has since funded over 40 deals across 7 states and 14 crop types. The company has over $160 million in assets under management with 4,200 total acres of farmland.
Now, these investments are open for everyday investors.
Be sure to read our full review of FarmTogether here!
One of the most difficult aspects of a farmland investment is finding the land.
FarmTogether takes care of that for you. Their team of veteran agriculture and real estate investment professionals leverages more than 100 years of experience to bring top-notch farmland opportunities across deal structures, commodities, and geographies directly to their investors.
Their sourcing process includes over 150 points of data to zero in on the best investment opportunities in their target geographies and crops.
Of all deals that they review, just 2% make it to their platform.
Additionally, after a farm is purchased, FarmTogether’s partners handle the operations of the farm. For the investor, this represents a passive income investment opportunity.
100% of farmland owned by FarmTogether is also enrolled and certified annually through the Leading Harvest Sustainability Standard, which verifies that farmland is being managed sustainably through outcomes-based evidence and third-party audits.
How To Add A Real Asset To Your Portfolio
FarmTogether offers investors a few different ways to invest. First, they provide investors with a crowdfunding option starting at a $15,000 minimum. With this option, accredited investors can purchase fractional ownership of a farm.
Second, instead of a particular farm, investors can invest in their Sustainable Farmland Fund. This investment represents a well diversified portfolio of various crops across multiple farms for a minimum of $100,000.
Third, investors also have the option of purchasing a farm outright through FarmTogther’s Sole Ownership Bespoke platform.
Real Assets vs Financial Assets: Final Thoughts
While these asset classes certainly differ, they share a common purpose. That purpose is to build wealth.
The truth is that they can both belong in your portfolio. Investing across multiple asset classes can be a great way to add diversity to your total portfolio.
But this is easier said than done. Investments in real assets typically feature high initial costs and significant work after purchase.
Investment platforms like FarmTogether help address this problem.
Learn more about FarmTogether to get started and add a real asset to your portfolio.