March 2, 2017

Northwest FCS News

Recently, a 68-year-old producer approached me with a question I do not hear too often these days. He is still farming and earning a positive net income. As a result, he has a little extra cash sitting on the sidelines. His question was, “Where is the best place to invest this stash of cash? Should I put it in the stock market, mutual funds, land, business investments or some other place?”

As a general observation, this gentleman appeared to be healthy and energetic with a retained zest for life. Regardless of the financial situation, these factors are foremost in fulfillment and happiness in business and beyond.

My initial response was to ask about his goals. I asked about his one-, five- and 10-year goals for the business, family and personal life. I also stressed that these goals should be in writing and reviewed at least annually. Without comprehension of these goals, it will be difficult to establish investment priorities. Too often, individuals seek their fortune in timing the stock market or flipping real estate only to find these actions are incongruent with internal goals, or the future desires of spouses or partners. Of course, this tends to complicate matters for the business, family and individual.

Once goals have been established, assess basic liquidity. Specifically, one should have enough cash to cover four to six months of business and household expenses. In this gentleman’s case, expenses are covered, but he also must take age into account. In today’s environment, some older and retired individuals are maintaining up to four years of living needs in cash. The prevailing logic behind this approach is that it negates the need to sell stocks, real estate or other assets in a suppressed market.

Concerning investments, it is also important to determine when the majority of the cash may be needed. Generally speaking, the life expectancy of a healthy 68-year-old male is 18 to 25 years. Therefore, investments in stocks and mutual funds with a mixture of growth dividends and safer investments are still appropriate if this is consistent with goals.

In regard to land investments, quality land has good, long-term returns both in appreciation and dividends such as cash rent. However, today’s environment places land in the lower part of the investment cycle. Holding your cash can earn a great return should land values correct 5 to 20 percent in a short period of time.

When considering an investment in a business, examine five years of financial records and trends of that business before investing. Is the business profitable and what is the quality of management? Is market demand strong and what are the current debt levels of the business? Even if the business is owned by a friend or relative, be sure to outline all agreements in writing with full disclosure and communication regarding any conditions to be included.

While this may seem like a simple question, determining the best investment requires examination of several variables as well as a careful thought process. It is true that deciding how to invest extra cash may be a good problem to have, yet it can also cause quite a problem without sufficient homework. Particularly as one progresses in years, it is important to plan for the future in ways that reduce the potential for future headaches in investments and life.