Portfolio diversification is crucial to withstanding bear markets. Rocket Dollar investors who want to diversify their tax-deferred investment assets can potentially find a favorable hedge against market volatility and risk by investing in timberland.
Timberland isn’t correlated to the stock market – trees still grow regardless of market dips and surges. Forestry has long been a strategic asset allocation for large institutional investors such as university endowment funds and insurance or pension funds. Institutional investors typically take a timber position through timber ETFs or REITs that own forest land or produce forestry products. The three largest U.S. timber REITs that harvest and sell timber products are Weyerhaeuser, Rayonier and Potlatch Corporation.
Until recently retail investors were for the most part denied the opportunity to invest in timber outside of ETFs and REITs due to scale – deals involved too much land and required millions. But more and more retail investors are choosing to invest in small woodlots and properties, the New York Times reports.
What is a Timber Investment?
The main assets in timberland investments are professionally managed national forests and private tree farms. Weyerhauser, the largest timber REIT, controls more than 13 million acres of timberland. The majority of investments in timberlands are managed by one of 17 different Timber Investment Management Organizations, the Realtors Land Institute reports. These organizations also help their clients locate and vet potential timberland investment options.
Timber return, meanwhile, has three main parts:
- Land value
- Tree growth
- Stumpage, or the actual value of the tree
Timber also is a viable asset for socially conscious investors since it’s a sustainable and renewable resource – forests can be replanted and re-harvested over time.
Why Invest in Timberland?
Institutional investing in timberland provides diversification and the opportunity to realize increased asset value as trees mature, which can provide portfolio growth regardless of the state of national or regional economies. Timber also can hedge against inflation, with historical returns benchmarked by the National Council of Real Estate Investment Fiduciaries. From 1993-2017, the risk-adjusted return on timberland investments was 8.36 percent, the NCREIF reports.
Timberland investment opportunities also vary by geographical region. The West and Southern U.S. feature a variety of softwoods, including Douglas fir and pine, which are commonly turned into 2x4s, plywood, strandboard and other forms of lumber commonly used in residential home construction. The hardwood forests of the eastern U.S., meanwhile, contain oak, cherry, walnut, ash and maple and other varieties that are commonly used to build high-end furniture and cabinetry. The value of timber assets also increases as trees grow in both size and volume.
Timber is a Tax-Advantaged Alternative Investment
Timberland investments can be structured to provide multiple value propositions. For instance, sub-sections of a timber property can be harvested, or investors can purchase timberland with more mature assets (trees) to reduce their hold times. Timber also can provide returns even in dire national economic situations.
Timberland provides Rocket Dollar investors with a hard asset that offers long-term tax-advantaged appreciation, reduced risk from market volatility, and a buffer from inflation. Contact our team of experts to learn more about how to invest in timberland through your Self-Directed Solo 401(k) or Self-Directed IRA.