Investing is fraught with economic uncertainties. While the general public may be surprised, investors and skilled financiers understand that markets will not remain calm indefinitely. In fact, if they did, it would be disastrous.
To reduce the risk of financial instability and collapse, investors diversify their portfolios and seek out stable markets. If you’re skilled at what you do, a financial crisis won’t have a big impact on your wallet.
Depending on your age, you’ve lived through a few economic downturns, whether it was the 1987 Black Monday Market Crash or the 2008 Global Recession. Regrettably, we’ve found ourselves in the same situation once more. Markets have been thrown into disarray as a result of COVID-19. Joblessness is on the rise, small firms are failing, and organizations that were once reliable investment vehicles are now suffocating.
Investors that are astute do everything they can to prepare for situations like these. We can’t, however, anticipate the future. Many investors, however, seek out “recession-proof” companies that will not lose value in the event of a downturn. Some even come across funds that increase in value while others decrease.
Farmland is that type of investment, as many people are discovering. For the uninitiated, we’ll explain why you should invest in times of crises, and why farmland is the best option.
Why you should invest during a recession
During a recession or economic slump, many people (including some investors) prefer to sit tight. Their 401(k)s are depleting, and their assets are shrinking, yet altering course might result in even more losses. At least, that’s how I’m thinking.
In reality, staying engaged and dynamic throughout a recession might help you emerge with more money and a more stable portfolio.
It’s far from certain that any stock will ever recover its value. Take airlines, for example: everyone needs to fly, which is why investing in Boeing or Delta always appears to be a safe bet. However, based on what we’ve learned from Blackrock’s annual letter and the purchasing habits of millennials and Gen Zs, airlines in their current form may decline in value over time.
In short, investing during a downturn is beneficial. However, consider the future when formulating your approach. Although the stock price is currently at an all-time low, no one knows what the future holds.
Part of the reason why farmland is such a wonderful investment during a downturn is because of this.
Why invest in farmland during a recession?
1. Land is less expensive.
Real estate and property values usually take a knock during a recession. When markets begin to settle, the value of properties lowers, which normally indicates a significant windfall for the real estate market.
A similar issue occurs in the case of farming. Following the financial crisis of 2008, according to a USDA study, “Based on regional dynamics, farmland prices and cash rental rates indicated a wide range of changes, ranging from no change to an 11 percent drop.”
However, you may argue that we were advised not to buy stocks merely because they were cheap. What distinguishes farming from other types of land? The answer is a combination of beneficial diversity and stability.
2. Affirmative diversity
In our book, we go over this topic in further detail “5 Reasons to Invest in Farmland” article. In a nutshell:
Other asset types are inversely correlated with farmland, while real estate is only mildly correlated with it. This means that, while other assets (stocks, bonds, etc.) lose value, land values rise, as do agricultural project yields.
In other words, farmland values tend to rise as the value of other stocks falls. But this may appear to contradict the premise that land is cheaper during a crisis, the value of the land as a real estate property declines, while the value of the farmland production grows. According to the same USDA report, “Across the country, the combined value of cropland and improvements climbed by 8.1 percent.”
Furthermore, farmland yields are frequently the source of inflation. As economies recover and purchasing power rises, governments will raise inflation to level the playing field. Because crop yields are directly linked to inflation, farmland investors benefit from this rise in the long run.
This is one of the reasons why farmland is seen as such a reliable investment.
3. Consistency
People need to eat whether it’s raining or shining, whether it’s a recession or a golden age. Crop yields are increasing year after year as the middle class expands and the population grows.
Many investors consider banks and high-tech assets to be very safe. Banks have been operating for hundreds of years and may be relied upon to provide stability to your financial portfolio. However, as a result of the 2008 financial crisis, many consumers were turned off by such technique. Furthermore, cryptocurrencies and fintech firms are igniting debates about nontraditional, digital, and decentralized banking, which has the potential to upend the entire business.
Farmland investors do not need to be concerned about this. Many investments have a return on investment “We, as a society, decide what we’re willing to pay for those services or products, which is known as “perceived value.” They don’t have any “We don’t base our concept of value on them because they have inherent value.
Historically, gold has been used to determine the worth of goods and currencies all throughout the world. However, as famously stated by Robert Frost, “Nothing made of gold can last.”
Farmland and crop yields have supplanted it as the most important inflation-hedging investments of our day. This means that while inflation rises, farmland and crop yields climb in tandem, maintaining the purchasing power of the land as it was originally purchased.
Is farmland recession proof?
Nothing is, unfortunately. Farmland is, well, land, as we saw in the USA report. When people have less money to spend on products, demand falls, and the value of those things falls as well. Farmland is no exception.
Farmland, on the other hand, is a rather stable investment during a downturn. It gives investors and individuals the assurance that they will recover once the crisis is passed. Many investments, including banks, are not in this category.
Farmland is a robust investment, according to many experts, and they aren’t creating any more of it. As climate change threatens the world and our ability to produce crops, legislators are pressing farmers and landowners to do more with less. This means that even if everything appears to be falling apart, the value of your investment may only rise.
The ultimate line is that, more than gold, high-tech, or banking, farmland is a sound investment to make during a downturn. One that will keep your portfolio afloat during the storm and increase as the weather improves.
FarmTogether is a farmland investment platform powered by technology that gives investors immediate access to the land they want, when they want it.
We only partner with farmers and land that we would personally invest in, thus our farmland is carefully selected. We’re also democratizing farmland ownership with investment commitments as low as $10,000 and returns as high as 13% with 9% cash dividends.
We want you to have a bigger say in how the land is cared for. We believe that different perspectives will lead us into the future of agriculture and farming as corporations strive to take over the country’s farms. All the while, we’re making money for our investors.
In a downturn, is land a wise investment?
These days, economic uncertainty appears to be the only certainty. That may have you questioning whether you should keep investing or just stuff cash under your mattress.
However, such severe measures are frequently based on emotion rather than data. Investing in real estate, especially during a recession, is an excellent decision, according to experts.
Indeed, many investors “win” during the Great Recession, thanks in part to the shaky housing market. While there is considerable debate regarding wealthy investors purchasing foreclosed properties, the fact remains that real estate is virtually always a sound investment.
Do lands lose value during a downturn?
In general, real estate values fall during a recession because there is less demand for residences or investment properties. It can lead to an increase in vacancies as individuals lose their jobs or become unemployed, as well as a fall in rental rates as tenants are less likely to rent a new unit or relocate at this time. Because consumers are having trouble paying their mortgages, short sales and foreclosures are on the rise.
While the scenario above is a common one, it’s crucial to keep in mind that different types of real estate will be affected differently depending on the reason of the recession and the state of the real estate market and sector. For example, real estate in many urban markets is deemed overvalued in today’s market (at the time of writing), with appreciation rates and housing values not supported by income increases.
Certain real estate industries in other markets are oversupplied. They may have an excessive amount of commercial real estate, such as retail space, high-end residential complexes, or self-storage facilities. These markets and sectors will be the hardest hurt if the housing market tightens.
In a recession, do house prices fall?
Most markets, including real estate markets, experience price declines during recessions. Due to the current economic climate, there may be fewer homebuyers with disposable income. Home prices decline as demand falls, and real estate revenue remains stagnant. This is merely a general rule of thumb, and home values may not necessarily fall during real-world recessions, or they may fluctuate in both directions.
During a recession, what normally decreases?
Two consecutive quarters of negative GDP growth is the usual macroeconomic definition of a recession. When this happens, private companies often reduce production in order to reduce their exposure to systematic risk. As aggregate demand falls, measurable levels of spending and investment are likely to fall, putting natural downward pressure on prices. Companies lay off workers to cut expenses, causing GDP to fall and unemployment rates to climb.
In a downturn, is it preferable to have cash or property?
- Liquidity. If you’re still working or semi-employed, your largest danger in a recession is losing your job. A cash account is your best bet if you need to access your money for living costs. During a recession, stocks tend to suffer, and you don’t want to be forced to sell them.
What percentage of your portfolio should be in cash? If you’re still working, you should have enough money in a non-retirement account to cover three months’ worth of living expenses. (If you withdraw money from a retirement account before the age of 591/2, you’ll have to pay taxes and penalties.)
You should probably keep around a year’s worth of living expenses in cash if you’re retired. According to Jeff Hirsch, president of the Hirsch Organization, which produces the Stock Trader’s Almanac, the average bear market lasts 404 days, or slightly more than a year. Taking money out of your stock portfolio during a bear market will only add to your losses.
When the economy slows, the Federal Reserve lowers short-term interest rates in an attempt to re-energize the economy. If you’re a borrower, this is fantastic. If you live off your savings, however, it’s a disaster. High-yielding investments, on the other hand, should be avoided. They’re dangerous at best. In the worst-case scenario, they’re a ruse.
The yield on the 10-year Treasury note is 3.76 percent. That’s how much you can make for a decade without taking any risks. It’s not a lot.
Accepting more risk can result in larger yields. The question is: what level of yield is sufficient? According to Bloomberg, a 10-year top-rated municipal bond yields 3.63 percent. State, county, and municipal institutions, such as toll roads and airports, issue municipal bonds, which are long-term IOUs.
Municipal bond interest is exempt from federal and, in some cases, local taxes, making it an excellent value. To earn the equivalent of a 3.63 percent tax-free yield if you’re in the 25% federal tax bracket, you’d have to earn 4.87 percent before taxes.
Moreover, the risk is low: defaults are uncommon. Each year, just approximately 0.3 percent of investment-grade munis default.
High-risk junk bonds, which are issued by corporations with weak credit ratings, can also provide greater yields.
Junk bonds now have a yield of around 10%. However, there’s a good probability that a trash bond would default, in which case you’ll get cents on the dollar.
Check out firms with decent dividend yields if you’re investing for retirement and can stomach the risk of equities over the long term. Dividends are quite important. For starters, they’re an important component of total stock market performance. The S&P 500 stock index has increased by 1,445 percent in the last 30 years. However, if you had reinvested all of your dividends, you would have made a 3,751 percent profit.
Reinvesting your returns over time is another fantastic approach to build up a retirement income stream. Let’s imagine you invested 10 years ago in 100 shares of Consolidated Edison, an electric utility. You would have had to pay $3,794 in total. You’d have roughly 170 shares ten years later, thanks to dividends reinvested. The overall value of your investment, including stock price increase, would be around $7,400.
Dividends are paid out dependent on how many shares you own. As a result, possessing 70 more shares increased your dividend payout. Con Ed paid $2.12 a share the first year you bought the stock, so you’d have received $212 in dividends. You would have made $360 in dividends over the past ten years if the payout had remained constant and you had reinvested your dividends.
Con Ed, like many other firms, has increased its dividend on a regular basis. Last year, it paid $2.34, bringing your total payout to $398 ($2.34 times 170 shares).
Companies that raise their dividends on a regular basis give investors an advantage over bonds. The interest rate on a bond does not change. Inflation erodes the value of a bond’s interest payments over time. A corporation that boosts dividends frequently, on the other hand, can help you beat inflation.
In a recession, what’s the worst that can happen? Your greatest concern, if you’re approaching retirement, is most likely losing your work. You would not only lose income, but you could also have to dip into your savings to make ends meet while looking for work.
Unemployment is, sadly, a defining feature of a recession. As a result, it’s a good idea to assess your financial situation and evaluate how you’d do if you were laid off.
“We become more conservative in our spending,” Barajas explains. “We’re more conscious of impulse purchases and question ourselves if we actually need it.”
Paying down debts, especially high-interest credit card debt, is preferable to making large new expenditures. You’ll have more cash on hand and, if necessary, a bigger credit line for emergencies.
Finally, create a portfolio strategy that meets your objectives, such as retiring in five years. Don’t let the stock market’s short-term woes scare you into making rash decisions, such as selling all of your stocks and putting all of your money in cash.
“Bull and bear markets are baked into the formula if you have a strong asset allocation,” says Ray Ferrara, a financial consultant in Tampa. “Moving away from a discipline that has served you well is one of the biggest mistakes you can make.”
With a decent asset allocation, you’ll have to rebalance from time to time, shifting money from high-performing investments to low-performing ones. For example, Barajas has invested in real estate funds, which have been hammered in recent months.
During a recession, what increases in value?
During market downturns, precious metals such as gold and silver tend to do well. However, because demand for certain commodities tends to rise during recessions, their prices tend to rise as well.
There are several ways to invest in precious metals. Purchasing coins or bars from a vendor or coin dealer is the most straightforward option. While this is not the same as purchasing a security, it is technically equivalent to any other choice.
If you want to invest in precious metals, look into exchange-traded funds (ETFs). These funds are pools of money invested in a single industry, in this case the precious metals market. If you’re saving for retirement, you might also invest in a gold IRA.
Lower Prices
Houses tend to stay on the market longer during a recession because there are fewer purchasers. As a result, sellers are more likely to reduce their listing prices in order to make their home easier to sell. You might even strike it rich by purchasing a home at an auction.
Lower Mortgage Rates
During a recession, the Federal Reserve usually reduces interest rates to stimulate the economy. As a result, institutions, particularly mortgage lenders, are decreasing their rates. You will pay less for your property over time if you have a lower mortgage rate. It might be a considerable savings depending on how low the rate drops.
Is real estate profitable during an inflationary period?
Over a longer period of time, such as 100 years, house prices have maintained pace with inflation, even outpacing it by 2 percent or 3 percent in developed nations, he said. Real estate is an appealing investment option now that inflation is at levels not seen in years.
How much did house prices fall during the 2008 recession?
According to the National Association of Realtors, home values fell by a record 12.4 percent in the fourth quarter of 2008, the largest drop in 30 years.
Will the housing market collapse in 2022?
While interest rates were extremely low during the COVID-19 epidemic, rising mortgage rates imply that the United States will not experience a housing meltdown or bubble in 2022.
The Case-Shiller home price index showed its greatest price decrease in history on December 30, 2008. The credit crisis, which resulted from the bursting of the housing bubble, was a contributing factor in the United States’ Great Recession.
“Easy, risky mortgages were readily available back then,” Yun said of the housing meltdown in 2008, highlighting the widespread availability of mortgages to those who didn’t qualify.
This time, he claims things are different. Mortgages are typically obtained by people who have excellent credit.
Yun claimed that builders were developing and building too many houses at the peak of the boom in 2006, resulting in an oversupply of homes on the market.
However, with record-low inventories sweeping cities in 2022, oversupply will not be an issue.
“Inventory management is a nightmare. There is simply not enough to match the extremely high demand. We’re seeing 10-20 purchasers for every home, which is driving prices up on a weekly basis “Melendez continued.
It’s no different in the Detroit metropolitan area. According to Jurmo, inventories in the area is at an all-time low.
“We’ve had a shortage of product, which has caused sales prices to skyrocket. In some locations, prices have risen by 15 to 30 percent in the last year “He went on to say more.