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How to Get Your Money Growing
Jim Gibbs didn’t grow up on a farm, but he might have if tragic events had not visited his family. His great-grandfather was killed in a tractor accident. A lack of financial planning, Gibbs later learned, left the family with little choice but to sell more than half the land to pay bills and to make a living. Later, Gibbs’ father and grandfather died unexpectedly within six months of each other.
These chapters of the family’s history are now etched into Gibbs’ work as a financial and retirement planning adviser.
“In my 20s, I never thought about issues like insurance,” he says. Now, he knows from experience that farm financial planning needs to include such protection, as well as a broader, more diversified plan that looks beyond the farm gate.
His branch of AXA Advisors in Springfield, Illinois, serves hundreds of farmer clients in Illinois and Iowa, and his experience in working with farmers has left an impression on him in terms of their special financial needs.
“Many farmers have considerable wealth in their land and other farm assets, but their cash and liquidity are low,” he says. “If something were to happen, they frequently don’t have a plan in place to cover the transition of an estate.”
What are the instruments to cover that situation? A savings plan, a good insurance plan, and a good tax-qualified plan/retirement plan, he says.
Another bucket of assets you need to think about is the one that holds off-farm assets, Gibbs and other financial advisers say.
Farmers in the U.S. have a lot of wealth to manage (more than $2.6 trillion this year). Land and buildings accounted for 83% of total farm assets last year, according to USDA. Of the nonreal estate assets, the financial category amounted to about 17% of the mix in 2016.
You may be focused on investments in land, machinery, livestock, and inputs inventory, but you should diversify into other financial tools to grow
your wealth, advisers say. These include mutual funds, common stocks, banknotes, and bonds.
“Farmers, like other investors, need long-range plans for their money, and as with any plan, diversification is crucial,” says Dan Garner, a Nebraska-based, Ameriprise Financial adviser who has 55 years of experience in agriculture. However, before you do anything, Garner says, first take stock of your farm business needs.
“For farmers in the accumulation period of their careers, I stress that they have a cash flow of at least six months’ expenses before thinking about investing any money other than into their business,” he says.
Beyond that requirement, investing wisely can pay big dividends in the long run.
Garner points to a dairy farmer client. “He started investing monthly from his operation as it grew. As it became more profitable, he was able to set aside more and more money. His portfolio is now worth more than $6 million,” he says.
Key Laws of Wealth
How do you accumulate and hold on to that kind of money? Garner, Gibbs, and other advisers say the current financial climate reinforces the following five key laws of wealth.
Farmers’ investments tend to be exceedingly conservative, Gibbs says. “A lot of them believe their portfolios to be diverse, but they’re actually not. They are often overweighted in taxable assets like cash, money market funds, CDs, and bank-type products. These instruments generate low returns in a low interest rate environment like today’s,” he says.
Garner agrees. “Once farmers are able to invest beyond the farm, I encourage them to diversify their holdings to include some individual stocks and mutual funds, invested in issues that are spread over all sectors of the financial markets,” he says.
Daniel Crosby, founder of Nocturne Capital and author of a new book, The Laws of Wealth, points out that the familiar can be a danger when you’re aiming to diversify.
“Our familiarity with something makes it appear less risky, which is why people tend to overinvest in the stock of their employers and tend to overconcentrate their portfolios in the direction of their home countries.
“I think the danger for farmers is overallocating to what they know and failing to account for the need to diversify away from agriculture. Specifically, I’d look for ways to get broad exposure to fixed income as well as foreign and domestic equities, since real estate and commodity exposure is something they already likely have.
“Buy what you know is one of the most common and most idiotic pieces of investment advice in circulation,” Crosby says.
2. Get some good help
All investors need help to keep from acting out of fear and greed, says Crosby. “Financial advisers are extremely valuable – but probably not for the reason you think,” he says. “Most people hire a financial adviser and think they are getting an expert money manager, but that’s not the whole story. The knowledge of how to invest is easy enough to get, but the courage to go it alone is nearly nonexistent.
“People who work with a financial adviser outperform those who do not by 2% to 3% each year, which is enormous as it compounds over an investment lifetime,” Crosby says. “That outperformance is gained – not by picking great stocks, but by saving you from yourself when you are most prone to make poor decisions.”
Gibbs agrees that the need often is to keep investors from making bad decisions, especially in an era of market volatility. “We want to be your partner to go through the financial-management process. Farmers have a daunting job to do with all of the things entailed in running a farm, and financial planning is a place where they usually can use some help,” he says.
3. form a plan and stick to it
Bailing on your financial plan and acting out of fear and greed is the best way to lose money, advisers say.
“The biggest mistake I have found is that farmers do not form a definite plan that addresses all the pitfalls that can happen during their accumulation period, such as market corrections, which will happen, we know, though we don’t know when,” says Garner. “You must plan to invest only money that can stay invested through any down market period, which you are sure to face at some point.”
Gibbs considers financial planning to be an ongoing partnership with an adviser – not a one-time deal. “In this interest-rate environment, planning requires a hands-on approach. It’s a long-term process,” he says.
4. Don’t forecast
Don’t try to forecast the direction of the financial markets. Even high-flying Wall Street forecasters can’t get it right. In 2008, the year of the great global financial crisis, the average forecast was a 28% increase, and the market fell 40%, says Crosby.
“The research is clear – forecasts don’t work,” he says. “Neither do the investment schemes that rely on them. Forecast-based investing is exciting, but it is not profitable and is consistently beaten by simple, rules-based approaches.”
5. Use your own scoreboard
Set your own benchmarks for success; don’t use other measures to score your investment performance, says Crosby. Measure success against your own needs, rather than a market index.
“The technique is called goals-based investing. This is when your investments are bucketed into several tranches that correspond with personal goals,” he says. “With goals-based investing, you’re more likely to stay invested during periods of market volatility, keeping your eye on your own long-term goals.”
Even during the financial crisis of 2008, most investors using the technique made no changes to their portfolios. They stayed focused on their own goals and, thus, were less likely to panic and make ill-informed changes, Crosby says. Those who panicked lost 25% or more of their money during that period.
In the end, investing is a lot like farming, where you work in one season but plan for the ones ahead.
“Have a multifaceted plan,” says Gibbs. “You have to look beyond one season to the next. Keep that short-term investment in one of your buckets, but consider the long term. You can’t base all of your decisions on how well one season’s crop has done.”
A Dozen Big Investment Tips
Here are gleanings from Daniel Crosby’s Big List of Great Money Advice.
- You don’t have to be rich to invest, but you have to invest to be rich.
- Invest in your mind and your skills first.
- The more complicated the investment advice, the more expensive and the less useful it is.
- Spend less than you make. Always.
- No one knows what is going on with the economy.
- The only sure thing about stocks is that there are no sure things.
- Stocks tend to pay well because they are so volatile.
- Diversification must occur within and between asset classes.
- Buy term insurance and invest the rest.
- If you’re excited about an investment, it’s probably a bad idea.
- A penny saved is more than a penny earned.
- Market corrections come more regularly than birthdays – so expect them.
The Laws of Wealth: Psychology and the Secret to Investing Success by Daniel Crosby is available at Amazon.com.