The All-Weather Investment Solution for a Tough Economy
Concerns continue to grow that the U.S. economy is on the verge of another recession. Understandably so, given the latest data from the Economic Cycle Research Institute.
The last two readings for the ECRI’s Weekly Leading Index growth indicator revealed that U.S. economic growth was actually negative. Yikes!
But we don’t need a growing economy to find investments that increase in value. In fact, there’s one overlooked investment we can count on to grow no matter what: trees.
I know. Trees hardly lend themselves to compelling conversation. But who cares? We’re talking about investments, not entertainment. And the truth is, timberland is a better investment than stocks.
It All Boils Down to Biology
Although few investors realize it, timber has outperformed the stock market significantly over time. Consider:
- Since 1987, the NCREIF Timberland Index climbed by an average of 13% per year, compared to roughly 10% for the S&P 500. (Don’t kid yourself. An extra 3% per year adds up over time.)
- Timber investments delivered negative annual returns only five times in the last 50 years. In comparison, stocks delivered negative annual returns 13 times.
Of course, there’s a simple fundamental driving this out-performance for timberland – biology. No matter what’s going on in the world or the markets, trees keep growing, silent and unattended.
The average North American forest produces about 8% more timber every year. And as trees get larger, they command premium prices.
It’s also worth noting that not even natural disasters can undermine timberland’s value, as damaged timber can still be sold. For example, after Mount St. Helens erupted, nearly 80% of the scorched timber was still suitable for sale.
So simply put, all that’s required for trees to increase in value is the passage of time.
Besides this built-in growth guarantee, there are two other major reasons to consider becoming a tree hugger…
An Inflation Hedge and Portfolio Diversifier, Too
Timber also represents a natural inflation hedge, as real prices for timberland have risen steadily for more than 100 years.
Mind you, during bouts of runaway inflation, like we experienced from 1973 to 1981, timberland really outperforms. In fact, it was one of the top-performing hedges, increasing by an average of 22% per year.
So if all the money the Federal Reserve is pumping into the economy leads to hyperinflation, like many pundits fear, history suggests that timberland provides a more than adequate hedge.
The most compelling reason to invest in timberland, though, is the fact that it sports a very low correlation with most asset classes. Less than 0.1. Accordingly, adding timber investments to a well-diversified portfolio enhances our return potential, while reducing risk.
As with any investment, there are some drawbacks. The most notable for timberland is the fact that pure-play investments aren’t readily accessible to the average investor.
More than two-thirds of timberland is privately owned. And most active investments are facilitated through TIMOs (Timberland Investment Management Organizations), which carry a stiff $5 million entry fee.
But we’re not completely shut out of the market. Several companies with timberland investments are structured as real estate investment trusts (REITs) and trade on the public markets. Plum Creek Timber (NYSE: PCL) and Rayonier (NYSE: RYN) are two worth considering. They both sport reasonable valuations and yields of about 4%, which is better than 10-year U.S. Treasuries.
Bottom line: Forget about what’s going on with the U.S. economy. Timberland is one investment virtually guaranteed to increase in value over time. And who doesn’t want that?
Ahead of the tape,