Timberland Returns Are Mixed But Still Beat Stocks

Some investors have diversified their investment holdings with timberland because in recent years timberland has tended to outperform stocks. But is buying and selling timberland always more profitable than buying and selling stocks? To help answer this question, I (RAH) examined the annualized returns for timberland and stocks from 1987 to 2007, using annualized returns of four holding periods (5, 10, 15 and 20 years) as the measure of performance.

Timberland values were measured using the NCREIF Timberland Index and stock values were the closing values of the S&P 500 for the last day of each year from 1987 to 2007. To learn how I computed the timberland index and annualized returns, see the companion spreadsheet.

Index Trends From 1987 to 2007

The chart of the two indexes shows the general increase of timberland prices and a more volatile pattern for stock prices.

20-Year Annualized Returns

The only 20-year holding period occurred for the 1987 purchase date. Its annualized return was 15.08 percent compared with the S&P 500's 8.98 percent return for the same period.

15-Year Annualized Returns

For the six 15-year holding periods, the timberland index returns were on average 1.5 times higher than stock returns. The timberland index generally declined from 1987 to 2007.

Stocks returns zigzagged until the 1990 purchase date, after which they gradually declined.

10-Year Annualized Returns

For the eleven 10-year holding periods (purchases from 1987 to 1997), returns of the timberland index gradually declined until the 1994 purchase.Then returns gradually increased.

Stock returns were more volatile. Timberland returns tended to be higher than stock returns for all purchase dates except for the 1993 and 1994 purchases when stock prices were relatively low.

5-Year Annualized Returns

Returns for the sixteen 5-year holding periods were quite volatile. The timberland index annualized returns declined steadily from the 1987 to 1999 purchase dates before moving to the upside. Their range went from 26.80 percent (1987 purchase date) to 3.83 percent (1999 purchase date).

S&P 500 returns were more volatile, ranging from 26.18 percent (1994 purchase date) to -3.78 percent (1999 purchase date). The peak stock return resulted from very high stock prices in 1998 and 1999. And the negative stock returns were due to purchases at very high prices 1997 though 2000.

Like the timberland index, stock returns for 5-year holding periods have moved to the upside since putting in a bottom with the 1999 purchase.

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Posted February 18, 2008.