Investing in timberland provides natural diversification, with potential benefits including biological growth, upward product class movement, and a natural hedge for paper portfolios. However, high purchase prices and natural disasters pose risks. Due diligence is important, and diversified holdings can show durability in volatile markets.
In the world of finance, an investment in timberland is pretty much what it sounds like. These types of investments provide a natural way to diversify your holdings. A forest investment is basically an investment in a forested or wooded area, whether it’s a natural old-growth forest or a man-made tree farm. Forests that include moderate human intervention are called “managed forests”. These are often chosen as an investment in the wood.
Investors often see many benefits in lumber investments. First, biological growth yields its value as trees mature. There is also the potential for increased demand for a specific type of wood or tree product – finance professionals call this “upward product class movement”. Additionally, there is also the increase in value of both trees and land.
Another big benefit of lumber investments is that they can provide a sort of natural “hedge” for a paper portfolio based on bonds and similar stocks. Financial experts say an investment in forest land may have a “negative correlation” with some paper investment options. This means that investors can balance profit and loss situations by pursuing forest properties.
Investing in Timberland is not without risk. When it comes to this type of real estate investment, diversification is important for an institutional investor, pension fund manager, or anyone approaching this type of managed asset. High purchase prices are a potential problem: An investor who doesn’t pay attention to “buy low, sell high” could be buying financial losses early on. Natural disasters can quickly erase gains from any type of external resource, including an investment in woodland, as farmers and other farmers throughout the ages have witnessed.
Just as with any other type of investment, those approaching a woodland investment often pursue “due diligence” to make sure that the value of what they are buying is equal to what they are paying for it. Some of these buyers hope that future events will cause an increase in value. Others are just betting that over time, increased demand and value will yield normal, moderate gains. Investors have their own reasons for choosing timberland investments as part of a larger investment strategy, but as professionals point out, diversified holdings, including timberlands, can show durability, even in volatile markets.
Smart Asset.
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