Reducing Portfolio Risk With Timber Investments

Investing in Timber is something that has become increasingly popular in recent years and this is largely because it is seen as a way to protect your portfolio in hard economic times. Retail investors as well as institutional investors have started using timber investment as a way to add a great deal of stability to their portfolios. Timber is becoming a great alternative to bonds and stocks which are seen as more volatile financial products in times where the economy is in turmoil.

One reason why the price of timber is so stable, making it such a secure investment, is because prices are negotiated for timber ahead of time. Supply contracts mean that manufacturers are able to hedge potential movements in prices in the market, making investing in timber a safer option for those looking for a low risk investment.

Cash flow in timber is rather interesting because it can often be a while before the investment matures. Once you have major investment it is likely you’re going to have to wait several years before the investment becomes profitable. The rate at which the investment matures largely depends on the sort of wood that you’re investing in as different trees grow at different speeds.

Interestingly, it can sometimes be financially sensible for the company to harvest the trees before the intended period. This is because trees are used for many different purposes, and not all of them require the trees to be fully mature. It will often depend on supply and demand in the market whether the trees are harvested early or not.

This can best be explained through an example: If timber is being grown and it is intended to be harvested for construction purposes when it is mature, this can change if the demand for wood pulp increases. If the demand has increased for wood pulp, then its price is going to increase as well, and it can be effective for companies to harvest the trees before they are mature, pulp them, and return the money to the investors.

Alternatively, if the price of pulp is very low, then trees that were intended for pulping, might be grown to maturity and sold at a later stage in order to return a higher amount to investors, although they are going to have to wait for a while.

There are several simple reasons why timber is going to be a good investment, and why it is going to become an even better investment in the future. One is the simple fact that the demand for timber is consistently increasing. Despite increased levels of recycling, the amount of wood pulp required continues to grow every year.

Investing in an industry which has constantly increasing demand is a sensible financial decision. Timber is also a good investment because it consistently beats the stock-market for returns and as we have already mentioned, is a safer investment.