The job of the investment adviser is to analyze the risk and returns of a variety of assets – from bonds to office towers, from international stocks to domestic timber, and everything in-between. It’s not an easy task, as they must look at things such as income streams, volatility, appreciation, management costs, etc. The challenging part then, is to fairly compare all the assets against each other over time to see which may fit best for their clients in the future.
A recent study from Iowa State University compared two of the more popular investments recently, U.S. stocks (specifically the S & P 500 Index) and Iowa farmland, to see which has performed the best over the past several years. Note that even though this report used Iowa as their benchmark for land, it’s likely that nearly all the corn/soybean states in the Midwest would have behaved similarly. The article (Comparing the stock market and Iowa land values: A question of timing) posted on the Iowa State extension website takes a critical look at how each has performed during specific time periods.
The graphs included in the article do a wonderful job of illustrating this timing phenomenon. From a practical standpoint, almost all assets look appealing at some point in their life cycle. The key is to determine whether these attractive returns are simply a blip, or something that can be sustained over time. Currently, both farmland and stocks are at historic levels, so which way will each go from here? Can both assets be a good buy even at these levels?
In the past 30 years, I’ve invested in both farmland and the stock market. Both have done very well at times, and both have nearly given me an ulcer. I’ve always favored land as the “buy and hold” asset, while my stock allocations fluctuated. One of the big differences between the two as Dr. Duffy points out – it’s a lot easier to get in and out of the stock market, if you only have a few thousand dollars, than it is to invest in land. I’ve also always been a firm believer in diversifying my holdings across several assets just to spread the risk. However, I will admit that no two people have exactly the same goals or risk tolerance so everyone needs to tailor their investments accordingly. As the article points, both farmland and stocks have done well in the past so perhaps there isn’t a bad choice with either.