Successful asset allocation means different things at different times

By Jordan Thayer
Financial Advisor, Morgan Stanley


What is asset allocation, and why is it important for farmers to get it right? Jordan Thayer, a financial advisor with Morgan Stanley, breaks it down.

Define assets in this context.

Essentially, asset allocation is the decision surrounding what percentage of your investments should be in stocks vs. bonds vs. farmland vs. heavy equipment vs. cash. This is determined by your specific investing goals, even if you have many at once. If you don’t get your asset allocation right — let’s say your portfolio should’ve been 50% stock but it’s really 10% stock — it’s not going to matter how great your underlying investments are if the stock market is up, and you’re missing out on major economic growth. The flip side is also true. If your goals and time horizon indicate you should be invested in something more conservative, then there is little need to invest in more volatile investments with larger potential returns.

What do you mean by asset allocation, and why is it important? 

The balance of owning different types of investments can help determine the stability of your portfolio as you move closer to retirement. It also can help improve the long-term growth of your portfolio if you are younger in your investing career.

Who is asset allocation important to? Retired or about-to-be-retired farmers or farmers who are just starting out? 

All of the above! Many of our region’s retiring farmers end up selling the farm and equipment to the next generation in order to provide the cash flow for them to live on in retirement. Wealth is certainly built within the farm … but is it accessible? 

It’s an admirable thing for the next generation to take the reins, but it may be beneficial for the next generation farmer to begin to invest in investments outside the farm like stocks and bonds. As part of a financial plan, those outside investments can grow to provide an income stream for that younger farmer to retire on and not force him or her into selling the farm to the kids, but rather gift portions of it and help give the kids a leg up.

Does asset allocation work differently when a farmer’s assets are often land, equipment, or a share of a crop (landlords)? 

These things are all assets (just like stocks and bonds) with either a resale value or cash flow potential. As a retiring farmer, cash flow is a top priority in order to pay your bills and enjoy your retirement years. Cash proceeds from crop share leases can certainly serve that priority. The reselling of assets (heavy equipment and machinery) can certainly serve that purpose as well, but finding a willing buyer is the question. Stocks and bonds have a huge market of willing buyers and sellers, hence why you see their prices broadcast far and wide. Heavy equipment and machinery have a more specific buyer, and those assets tend to go down in value with age and use. They are wonderful tools and assets to own, but may not command the prices one would like as they approach retirement.

How does one go about allocating their assets? 

Different asset classes have different historical rates of return. When considering different investments, it stands to reason to look at the historical rates of returns of stocks, bonds, and other investment options. My belief is that some basic math should be done to determine the rate of return of the farm and business itself. What is the rate of return of your farming business? No doubt, it is respectable if it supports a grower’s family and lifestyle. Would it make sense to add another investment to the mix? It’s a question worth asking. If you’re going to invest in another 100 acres of land, what are the additional requirements to make that land pay? Another tractor? Another few farmhands plus the cost of benefits? After some thoughtful calculations, you may arrive right back at purchasing more land or tractors. If that’s the case, great! I’m just advocating for a thoughtful decision and looking at the numbers.

Does the allocation change over time? In other words, would a retiring farmer want to allocate their assets differently than a 40-year-old farmer?

Oftentimes, yes, it does change over time. A 40-year-old farmer may be comfortable owning some stock in good quality companies, even though the stock market can go up and down at times. Theoretically, over a 25-30 year holding period, those stocks would be worth more than when they bought them. A 65-year-old farmer getting ready to retire may not want to endure the ups and downs of the stock market and may feel more comfortable in bonds that pay a dividend. Typically, within five to seven years of retirement, a “pre-retiree” would want to reduce the amount that their investments go up and down in value and prefer them to stay stable. That way, a portion of their portfolio can be relied upon to pay month-to-month bills.

As always, a trusted financial advisor can help you determine what stocks and bonds are in your best interest.  

Jordan Thayer is a financial advisor with the Global Wealth Management Division of Morgan Stanley in Seattle, Wash. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

CRC 5639090 04/2023