What is a Timberland Investment?

In the world of finance, a timberland investment is pretty much what it sounds like. These types of investment provide a natural way to diversify holdings. A timberland investment is basically the investment in a forested or wooded area, whether that area is 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 a timberland investment.

Investors often see a lot of pluses in timberland investments. First, biological growth produces its own value as the trees mature. There’s also the potential of rising demand for a specific type of wood or tree product: finance pros call this “upward product class movement.” In addition, there’s also the routine rise in value of both trees and land.

Another big benefit of timberland investments is that they can provide a kind of natural “hedge” for a paper portfolio based on bonds and similar equities. Finance experts say a timberland investment can have a “negative correlation” to some paper investment options. This means that investors can balance gain and loss situations by pursuing timberland holdings.

Timberland investment is not without its risks. When it comes to this kind of real estate investment, diversification is important for an institutional investor, a pension fund manager, or anyone approaching this kind of managed asset. High purchase prices are one potential problem – an investor that doesn’t pay attention to “buy low, sell high” may be buying into financial loss from the start. Natural disasters can quickly wipe out the gains from any kind of outdoor asset, including a timberland investment, as farmers and other agriculturalists throughout the centuries could all testify.

Just as with any other kind of investment, those who approach a timberland investment often pursue “due diligence” to make sure that the value of what they’re buying is just as high as what they are paying for it. Some of these buyers are hoping that future events cause value to spike. Others are just betting that over time, rising demand and value will produce normal, moderate gains. Investors have their own reasons for selecting timberland investments as part of a greater investment strategy, but as professionals point out, diversified holdings including timberland can show durability over time, even in volatile markets.