You can learn a lot about finance from a farmer.
I know I have. My Grandpa Joe was a farmer. So was my business partner at one time. And I’m pretty sure the “field knowledge” they gained over the years holds as much value as anything I’ve heard from Wall Street investment gurus or famous media pundits.
It’s remarkable, really, how similar farming is to finance. Here are a few of my favorite takeaways, courtesy of Grandpa Joe:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Make sure your crops are paying rent.
When you’re a farmer, you depend on the crops you plant to provide income, and the same thing is true for investments. Because dividend-paying stocks allow you to earn income without selling your stake in a company, they can be an important part of a long-term investment plan. It’s up to you to decide whether you’ll take those dividends or reinvest them — just as Grandpa would put part of his profits back into buying more seed.
2. Don’t overlook the importance of the root cellar.
Big old barns have their place on the farm. But the truth is, the barn is vulnerable. In a storm, the roof can collapse or blow off — and out goes whatever you have inside. The root cellar, on the other hand, is stable; it’s where you stash the things you want to keep secure. In financial planning, we talk about building a solid foundation for retirement with reliable income and safe investments. The roof is made up of more moderate- and high-risk investments, which are likely to be the first to go when things get turbulent.
3. Keep the fields healthy with crop rotation.
In farming, growing the same crop in the same field again and again depletes the nutrient balance in the soil. That’s why farmers periodically rotate in something different — soy beans in place of corn, for example. In finance, moving money from one industry sector to another in search of growth and/or value can be part of an investor’s overall strategy for building a stronger and more diversified portfolio. Why limit yourself when there are so many asset classes and sectors to choose from?
4. Don’t put all your eggs in one basket.
It’s pretty clear what happens if the bottom drops out of an overloaded basket on the farm. But what about in the market? Advisers preach diversification, yet we regularly see investors with redundancies in their portfolios. Talk to your financial professional about eliminating any overlap in your mutual funds and ETFs, and about rebalancing at least once a year to get back to your target allocations.
5. Keep the fox out of the henhouse.
Sneaky predators are a real problem on the farm — and in the world of finance. Keeping your money safe isn’t easy — and volatility isn’t your only foe as an investor. There could be a slew of hidden fees feasting on your nest egg, from administrative fees to imbedded capital gains. If you’re only looking at the bottom line on your investment statements every month, you’re missing a big part of the picture.
6. Pay tax on the seed, not the harvest.
If all goes as expected for a farmer, the season’s yield will be substantially more valuable than the seed it grew from. As an investor, you have the same goal: You’re in it for the growth. Which means you should be careful if you’ve been putting all your savings into a tax-deferred retirement account. Yes, you’re lowering your tax bill now, but when you withdraw that money in retirement, you’ll end up paying income taxes on your contributions and earnings. Don’t depend on the popular (but often incorrect) notion that your tax rate will be lower in retirement. Talk to your tax professional about what your situation could look like and ask your financial professional about the advantages of a Roth IRA.
7. Pruning stimulates growth.
With proper pruning, you can create a better plant — and so it goes with your investments. Every stock doesn’t have the same shelf life, and a buy-and-hold strategy doesn’t necessarily mean handcuffing yourself to a particular purchase. It’s OK to take gains when appropriate, and to buy when prices are low. It can make your portfolio healthier and rid you of products that no longer have a purpose.
8. Don’t lick your calf over twice.
OK, gross. But in Grandpa’s day, this meant having to do a task over again because you didn’t get it right the first time. For me, it means sitting down and putting together a comprehensive retirement plan that suits a client’s needs and goals. Yes, you may have to do a little tweaking here and there over the years. But a good plan will help you stay the course through good times and bad.
Most of all, Grandpa Joe knew being successful at anything took diligence and patience. Whether you’re a little bit country or a lifelong city slicker, that same philosophy applies to building the retirement lifestyle of your dreams.
Kim Franke-Folstad contributed to this article.
Investment advisory services offered only by duly registered individuals through AE Wealth Management LLC (AEWM). AEWM and Olson & Wilson Private Capital are not affiliated companies. Investing involves risk, including the potential loss of principal. Neither the firm nor its agents or representatives may give tax advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 749931
-
September Fed Meeting: Live Updates and CommentaryThe September Fed meeting is a key economic event, with Wall Street keyed into what Fed Chair Powell & Co. will do about interest rates.
-
Ask the Editor: Questions on 529 Plan Rollovers to a Roth IRAAsk the Editor In this week's Ask the Editor Q&A, we answer four questions from readers on transferring 529 plan money to a Roth IRA.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
-
Want to Shave 10 Hours Off Your Workweek? A Startup Expert Shows How AI Can HelpArtificial intelligence is overhauling how companies operate, freeing up entrepreneurs and their workers to skip the menial stuff and get down to business.
-
Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial PlannerHolding too much of one company's stock can put your financial future at risk. Here are four ways you can strategically unwind such positions without triggering a massive tax bill.
-
Beyond Banking: How Credit Unions Serve Their CommunitiesCredit unions differentiate themselves from traditional banks by operating as member-owned financial cooperatives focused on community support and service rather than shareholder profit.
-
Answers to Every Early Retiree's Questions This Year, From a Wealth AdviserFrom how to retire in a crazy market to how much to withdraw and how to spend without feeling guilty, a financial pro shares the advice he's given this year.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate ExpertSome new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
-
I'm a Financial Adviser: You've Built Your Wealth, Now Make Sure Your Family Keeps ItThe Great Wealth Transfer is well underway, yet too many families aren't ready. Here's how to bridge the generation gap that could threaten your legacy.
