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Diversified Stock Portfolios Are Not Enough – Sell Trees

November 14, 2016
Cody
Cody

 

Diversified Stock Portfolios Are Not Enough – Sell Trees

 

For many people a diversified stock portfolio is all they need to feel safe about their wealth. While this is certainly a great thing to have, the reality is that stocks are just one avenue for investing and true diversification goes way beyond holding shares of a company.

If you’re looking to really get involved in building your wealth, then you should know about timber. It’s one of the most boring investments out there, but has historically returned ~10% annually.

Timber is easy to understand too – it’s literally like growing a money tree. It’s not some complicated stock trade that involves derivatives and leverage. Just plant a tree, let it grow, harvest the lumber, and walk with your profits.

But, simply planting a tree and waiting for it to grow is only one part of the investment. For someone who wants to maximize their returns, they should be adding a real estate component.

Planting timber on real estate that you own pays you a ‘carry fee.’ So, if you have invested in a piece of land with the idea that the land will appreciate in value, you can grow timber on that land while you wait. It’s almost like renting out a house to a tenant, except you have way less to manage.

For example, I’ve invested in land in Panama (where I am right now). I think this land will appreciate significantly in the coming years, but there is a problem. While I’m waiting for the land to appreciate, the land just sits there doing nothing. Additionally, I am not guaranteed that the land will actually gain value. Although unlikely, it might be worth the same in 20 years as it is now.

But, if I grow trees on that land while I wait, I’m at least getting some type of return and I’m not putting all my eggs in one basket. The land value could be stagnant, or even decline, and I’ll still profit from the lumber when it’s ready to harvest.

The ultimate way to make this investment is to do it yourself. Your returns will be much higher, as you won’t be paying any management fees or relying on any third parties.

However, I realize that for most people this is not an option. They can’t just go buy some land, plant trees, and expect to start making money. There are all kinds of tiny details that complicate the process.

One option is to buy timberland that is managed by a company. There are lots of these companies out there and they allow you to actually own the land that they are managing. You give them money, you take title of the land, they grow and cut down the trees, you take profits. The problem is that there is usually a minimum investment of about $25k USD.

An easier option is to just buy timber stocks that are structured as REITs (real estate investment trusts). Rayonier ($RYN), Weyerhaeuser ($WY), and Potlatch ($PCH) are three great stocks to give yourself timber exposure. Unfortunately, all three are a bit expensive right now, but we can keep our eye on them until we have a buying opportunity.