Can Money Grow On Trees?

By [http://ezinearticles.com/?expert=Dobromir_Stoyanov]Dobromir Stoyanov

I was researching alternative assets classes that not only could perform as well as the stock market but also provide good diversification opportunities as well as passive income possibility. One asset class which seems a little overlooked is timber.

According to several sources , in timber has beaten the stock market by 4 percentage points from 1973-2003.

There are several advantages of in timber:

Timber is uncorrelated to stocks

The price of timber has consistently beaten inflation by 3.3% over the past decades

Unlike other commodities, trees grow every year by 4% - 10% and as they age their wood becomes more valuable

Even if prices decline, you can decide not to cut your trees in a given period. Your trees would be growing no matter what you decide to do with them.

You get certain tax breaks - your profit is taxed as a capital gain. On top of that, as timber is cut, another tax break called a depletion allowance kicks in.

You could invest in timber REIT's, like PCL and RYN, which are publicly traded on NYSE

The Food and Agricultural Organization of the United Nations forecasts that world demand for wood will nearly double by the middle of this century.

The USDA-Forest Service projects that demand for U.S. forest products will reach 25 billion cubic feet annually by 2050, up from nearly 18 billion in the 1990s.

There are several disadvantages of in timber as well though

Most direct timber investment is limited to wealthy individuals who can chip in at least $1,000,000 to $5,000,000.

Timber Investment Management Organizations typically require a ten year lock up period to their investors

Timber Investment Management Organizations typically charge

hedge fund like fees of 1% on all the assets invested plus 20% of the annual profits. It seems like you do need some managing of your forests in order to maintain them.
Trees could be subject to fires. 0.5% of all trees suffer from this

Trees could suffer from disease's, so one should spread their timberland holdings across the globe
Timber investments have soared form 1 billion in 1989 to more than 20 billion by 2005. Seems like the market is getting crowded.

Even though timber investments have provided investors with 22% annual returns on average form 1987-1996, the returns have dropped to 8 % over the past decade

Demand for timber is subject to cyclical swings in the economy. If housing starts plummet or manufacturers need less cardboard, then prices could plummet.

For more information on investing, feel free to visit my blog at http://dividendgrowth.blogspot.com

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