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Crop Rotation

Published by: Nathan Smith Date: July 15, 2017

After moving to East TN in 2008, I was fortunate enough to find a house in a small neighborhood that had a community garden.  Having always grown up in the city, the most gardening that I ever did was planting a tree.  I had never experienced the joys and the pains of trying to raise my own fruits and vegetables.  Against the sage advice from my neighbors, I did what any self-respecting city boy would do and planted about 50 tomato plants with a few squash plants thrown in for good measure.  That first year was wildly successful and by mid August, I was so sick of tomatoes that I ended up giving most of them away.
Above:  Community garden 65′ X 65′
The next year I was given more space in the garden, and planted more tomatoes along with some squash and cucumbers. I  spent the winter learning about canning so was well prepared to withstand an overflow of tomatoes.  But that summer, right as I was getting ready to start harvesting, an intense heat wave came over the entire region with multiple consecutive days of temperatures over 100 degrees.  Most of my tomato plants burned up and I was left with little else in the garden to harvest that year.
I realized that like investing, I must look to diversify my crops in order to deal with the yearly weather deviations that are a boon to some plants and a bust to others.  For the past three years, I took the diversification approach with my garden and planted close to 20 different types of plants: ones that will thrive in the heat and ones that would thrive in wet or dry conditions.  The results have been about as expected, with some plants producing and some that are lagging behind.  Last night, I pulled 30 okra pods from my plants and will be enjoying them the only a way Northern transplant to Tennessee would: coated in corn meal and deep fried in vegetable oil.
With the performance of U.S. markets over the last six years, it has been very tempting for investors to plant all their funds into U.S. stocks while ignoring others like international and emerging markets stocks that have been laggards.  But many investors are quick to forget that U.S. stocks weren’t always the best place to be, and that during the last decade there was a period of time where U.S. stocks badly under performed against international stocks.  Between 1973 and 2014 the S&P 500 beat a globally diversified portfolio 16 times, while doing worse 26 times.

Whether it’s planting crops in a garden or investments for your portfolio it will never be wise to move all into one particular asset class, especially the one that did the best in the last several years.  As investors, we want to maintain exposure to many different areas of the market at all times, participating in the feast of some while still having some exposure to others that are going through a famine.  It’s nearly impossible to be able to predict which markets will be in favor, much like it’s nearly impossible to predict the growing climate for the next season.  Maintaining an appropriate portfolio strategy by rebalancing from assets that have performed well into those that have lagged will give investors the potential to take advantage of opportunities as the climate changes and returns improve. Diversification along with managing portfolio risk and developing a sound financial plan will help investors harvest the bounty when they reach their retirement years.

Nathan Smith is Portfolio Manager at Rather&Kittrell, and can be reached by email at nsmith@rkcapital.com.