“Tired of market volatility?”
Clint Snead
President at Box Financial Advisors
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
— Phillip Fisher
I see these ads regularly. If you are wondering, “Can you reduce exposure to the stock market?” or, “Are there benefits to alternative investing?” The answer is YES; and we can help. This article will explain why. And our next article will explain how to start your research. You don’t want to research? Then stop now and just give us a call.
Ten years ago, many financial advisors shunned alternative investments and now it is the largest segment being added to their client portfolios. The primary reason? To reduce portfolio volatility. Think of this as a drawdown risk reduction.
If you invest a dollar but lose 25%, you need more than 33% return to recover. Not great but imagine if you lost 50% and need 100% return to get back to breakeven. This is why many are looking to other asset classes or “alternatives” to spread out the risk of when the stock market has a normal drawdown period. If you invest in an alternative, you can have the potential long-term upside while having a different set of downside risk factors.
At Box Financial, we’ve helped our clients invest over $100 million “alternatives” since founded in 2010. We know a little bit about private investments and the benefits of adding them to your portfolio. So, if you were to ask us, “What is the best example of why to use alternative investments?” We would suggest you examine farmland.
If you buy a farm and lease it out to a tenant farmer, you will see that farmland has a similar return profile to a rental property. You want to capture the periodic cash flow from rent and the long-term appreciation of the land. Our team would say that we do not want to know how well we can farm, we instead find the best farmland team to then manage that asset for our clients.
Farmland, as an asset class, has not had two consecutive quarters of negative returns since 1991, so it has a very limited downside exposure. On the upside, farmland only appreciates 1-6% per year. However, if you capture rent of 4-5%, the combined cash flow and appreciation now give the same long-term upside potential as stocks, at a much different downside risk. That is why many of the top farmland asset managers have a two-year waiting list, because of the high demand from investors.
This is also why high net-worth individuals own rental properties. They offer a long-term return for owning an asset that still has risk yet different exposure to traditional stocks and bonds. In addition to single family residential and farmland, there are many other asset classes that offer this same risk/return profile to target essential needs, basic infrastructure, or other distinct advantages.
Our investment philosophy is to uncover these asset classes, complete a thorough due-diligence, and recommend the top for clients to invest.
