In addition to wealth-building opportunities created by market changes, there are a number of other reasons to consider adding timber to a portfolio. The demand for timber is increasing.
As of 2008, the demand for timber has been increasing as forest-related product development grows. Even paper recycling efforts have had little effect on demand, and according to the Society Of American Foresters, every American consumes a 100 ft. tree each year. Timber is an inflation hedge. Timber increases in value "on the stump" at a greater rate than inflation. According to legendary investor Jeremy Grantham, timber prices in the last century (~1905-2005) have also grown at a rate that is approximately 3% greater than inflation.
Timber returns beat stocks. Measuring returns using the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, timber investment returns exceeded those of the S&P 500 from 1990 through 2007. In that period of time, the NCREIF Timberland Index annual compounded return was 12.88% versus 10.54% for the S&P 500 index. This excess in return was also provided with less volatility as shown by the Sharpe ratios for the same period (1.06 for timber, versus .45 for the S&P 500), underscoring the risk/return benefits of timber over the overall stock market. Timber has low correlation to other asset classes. Commercial timberland prices are impacted by a different set of market and economic factors than other asset classes. Because prices are not affected by the same factors, timber returns are not correlated to returns of other asset classes, such as stocks, bonds and real estate. The addition of a low correlation timberland asset will increase the diversification of an investment portfolio. The NCREIF Timberland Index returns from 1990 through 2007 showed moderate to weak correlation against equity and fixed-income indexes and a negative correlation to real estate.