Investing outside of the business

Coming off of a record year for stock market earnings, the domestic and global economies continue to show strength in several sectors. This has prompted many in agriculture to consider investing some of their revenue outside of the business.

At a recent event for young producers, one participant asked my advice regarding outside investments, which was clearly a pertinent topic for others as well. Questions followed that included the percentage of income that should be invested, stock and mutual fund performance, and stock market levels among other issues.  While this is a timely and relevant question, it is important to assess some basics before looking at any investment of capital. 

Although many may cringe at this thought, a good standard is to invest 5 to 10 percent of net income outside of the business. First, this offers some advantages such as deferred taxes if committed to a 401(K), 403(B), a simplified employment plan (SEP), or a traditional IRA. Next, some will argue that investments in the farm yield a higher rate of return when compared to other investments. While that may sometimes be the case, limiting investments to the farm offers little to no diversification or risk mitigation.   Just as investors would never commit their entire portfolio to just one stock, producers should not concentrate their investments only in land.      

A solid investment strategy is much like the old story of the tortoise and the hare.  When investing early in life, one can make time a friend. Younger producers most commonly have enough years for investments to weather the ups and downs of the market and yield a positive, compounded return. Yet, once investors become older, their investment strategy must reflect their ultimate goal, which for most is funding retirement.  Ideally, up to 50 percent of one’s retirement income should be generated by outside investments and Social Security. This provides flexibility as well as diversified streams of income that can be invaluable in a family business transition.   

For this participant, she and her husband should explore high quality stocks and performing mutual funds with low fees. They should continue to invest based upon their goals and appetite for risk. I would say that the stock market is close to bubble territory.  And for an investor my age, a more conservative approach would be most prudent because of less time for market recovery. However, for a young couple, perhaps the Rolling Stones said it best with their songs “Time’s on your side,” and “Start me up.” Now is a great time for any young couple to develop a strategy and start investing outside the business for their future.

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