Long-Term Portfolio Returns from Timber and Financial Assets

Abstract

Executive Summary. This study estimates inflation adjusted multiperiod portfolio returns from direct real estate investments in Douglas fir and Southern pine timber stands combined with common stocks, corporate bonds, U.S. Government bonds, and U.S. Government Treasury bills over the fifty-eight-year period 1937-1994. A theoretical timber returns benchmark is created that is highly correlated to historical timber prices. The wealth accumulation one may have realized during the 1937-1994 period from investments in Douglas fir, Southern pine and common stocks is presented. The wealth accumulation is substantial for each of these assets, but the timber assets display both a higher return and higher variability. An empirical risk-return relationship for the financial market investments is developed using a multiperiod portfolio optimization technique. Timber asset returns are then included with security returns as input for the portfolio optimization routine. When the optimization model allowed unrestricted choice among assets, it was common to include timber assets in the portfolio. Timber assets were in some cases the only components of the portfolio. The long-run risk-return results, however, were unfavourable. Employing a strategy of holding a fixed portfolio allocation (%) of timber assets while rebalancing one's holding of financial assets, however, appears favorable. Holding a fixed 10% of a portfolio in timber showed about a 1% higher rate-of-return across portfolios with no increase in risk. Higher timber proportions indicated higher returns, but with higher risk.