Managing Investment Risk

I have personally been burned with investments on a number of occasions and have the scars to prove it. Remember Enron? The company’s stock rose rapidly, and everybody wanted a piece of it. Unfortunately, nobody really seemed to understand how they were making so much money and the accounting on their energy trading entities was opaque, at best. The “smartest guys in the room” had a business plan and earnings that seemed too good to be true. Well they were too good to be true, and I lost about $10,000 overnight as the stock’s value plummeted to near zero.

Though Enron was essentially a fraud, that painful lesson reinforced the value of portfolio diversification for me. It also was evident that complex investments, no matter how attractive they look, are not necessarily the safest investments. Bitcoin is not simple to understand, yet people continue to pump money into it, driving the cryptocurrency to daily record highs.

Investors who have money in the stock market and Bitcoin have been rewarded particularly well this year, but how well are they prepared for the inevitable downturn? Markets that move up rapidly tend to fall precipitously. Dr. Robert Shiller’s PE Ratio provides a pretty good indicator on the overall value of the stock market.

The Schiller PE Ratio has only been this high once in history.

From a historical standpoint, it certainly appears that the stock market is over-valued, or at least approaching that territory. Since the Enron debacle, I’ve learned to better manage my investment risk by allocating funds across multiple asset classes, especially real estate and income-producing agriculture. These assets produce a regular yield and the underlying land tends to appreciate over time at pace with inflation. Making money in agriculture isn’t overly complex or hard to understand like Enron’s trading schemes. Essentially, farmers grow crops or raise livestock and investors reap the dividends when the products are sold at market.

Though agriculture carries risk like any other product, it is a significantly less volatile investment than today’s frothy equity markets, and especially suitable for investors who want to grow their wealth over the long term. I like agriculture so much that I created a platform to allow people to access these investments with as little as $5,000. In a recent blog post, we discuss the ways that risk can be reduced for investors in agriculture to keep you from getting new investing scars.