At a recent investor seminar in regional Victoria the strengths and weaknesses of a farmer's approach to investing - and business - were on display.

For a start there was the stoic acceptance of the drought and no-one needed a statistical analyst to tell them this had been a drought 10 years in the making. City types from Melbourne whingeing about stage two water restrictions got short shrift - stage four with water catchments well below 10% was the reality out there.

But underneath it was an optimism and sense that this too will pass. Some old hands were cheerfully predicting a wet year next year and were already planning how much seed they could get in the ground.

Farmers understand that things go in cycles but you wonder how many investors would stick with a fund, share or property if they had just been through 10 years of diminishing returns.

The acceptance of the natural order of things is a trait every farmer needs if they are to survive mother nature's stern tests. But strengths can also be weaknesses. Farmers understand the risks of things like drought and disease all too well but often fail to grasp the value of diversifying risk outside the farm boundaries. In that they are probably quite typical of a lot of small business operators - intimately understand the risks and rewards of their particular businesses but struggle with the notion of investing outside familiar territory. Because of that many struggle to escape the boom to bust business cycle - despite invariably describing themselves as "conservative" investors.

At the investor seminar were a number of farmers who had recently retired or were approaching that landmark event. These were people who had had to confront the issue of funding their retirement and grappling with the issue of how to hand the farm on to the next generation but at the same time ensuring their retirement income needs were taken care of.

They understood two things clearly - the value of good advice to help work through the planning issues and the real value of diversification into assets off the farm in lowering their personal risk profile and providing regular income.

Their only regret was they had become aware of the value of both things late in their working life - and were now trying with limited success to get the message through to their adult offspring.

The farming approach could possibly teach investors in the Australian sharemarket a thing or two about now. The contrast could not be starker: farmers facing severe drought while share investors have just enjoyed a three-year boom with 20% plus returns each year. So now would be a good time for share investors to remember what farmers know all too well - that markets, just like our weather, move in cycles.

So rebalancing the portfolio and diversifying the risk away from one particular market - or asset in the farmer's case - makes a lot of sense regardless of whether you call city or country home.

Smart Investing
By Robin Bowerman
8 September 2006
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au