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.
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It's remarkable, really, how similar farming is to finance. Here are a few of my favorite takeaways, courtesy of Grandpa Joe:
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?
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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.
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Kim Franke-Folstad contributed to this article.
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