I’m always looking for an asset (or asset class) that can really change the risk/return profile of a portfolio. Lately I have been a little bit fascinated with timber.

While timber is a relatively new investment for individuals, it has been used by endowments, insurance companies and other institutions for some time now.

“Timber” you say. Why would I ever want to own timber? Good question.

Historically timber has exhibited an exceptional risk & return profile with above average returns and below average volatility.

An investment in timber is made for 3 reasons: return, hedge against inflation, and diversifications benefits.

Return
The first, and most obvious, reason is for the potential of growth in your investment. A quick look back at the annual returns of timber (NACREIF Timber index) shows that timber has shown strong historical performance.

From 1987 until 2005 timber has returned an average of 15.79%* while the S&P 500 has returned an average of 12.92% over the same timeframe.

NACREIF Timber Returns

Currently the NCREIF Timberland Index* is the most popular timber index and is published by the National Council of Real Estate Investment Fiduciaries (NCREIF).

For a more detailed explaination of how the index is computed check out the measuring timberland performance by the James W. Sewall Company.

In addition to strong returns Timber has shown fairly low risk (as based on standard deviation). Between 1987 and 2005 timber had a standard deviation of 11.45% compared to 17.04% and 18.71% for the S&P 500 and MSCI EAFA respectively.

Inflation Hedge
The second reason to invest in timber is as a hedge against inflation. While timber most likely does not hedge against inflation in the short term due to pricing volatility, there is evidence that over the long term timber has beaten inflation handily.

Perhaps one of the reasons that timber is able to hedge inflation is due to timbers biological growth aspects.

Diversification
Another reason that you invest in timber because it has a low correlation to other asset classes (stocks, bonds, etc.). Based on my analysis of historical returns timber has the following correlations with different asset classes.

Timber