In uncertain times, with markets usually volatile, it is tempting to make long-term investments and hope to ride out any economic storms.
There are advantages and disadvantages to all types of investment terms so what are the specific benefits of Long-Term investments.
The most obvious benefit of long-term investing is compounding. This is the effect of dividends or interest being reinvested to achieve sustained Capital Growth.
If investing on a regular basis, this equates to cost averaging. This means that you may purchase shares or units monthly for example and the cost of the units will differ short-term but as long as the overall investment increases long-term then any troughs or peaks are smoothed.
What about a lump sum long-term investment?
In this instance you are hoping that the investment increases over the long run to achieve capital growth or any income derived will outweigh capital depreciation. However, what if the investment actually grew over the long term, GUARANTEED.
If you think about it how many investments can you think of that physically grow and offers huge demand and markets.
For a long-term and stable investment, you couldn’t do much better than an investment in Timber. When other investments have been heading down hill, timber remains a solid investment opportunity for the savvy investor. If you look at the return on investment figures for the last forty years, timber comes out as a top performer when measured against many other asset classes.
So how does a forestry investment work?
Usually, an investor will commit a lump sum. This will purchase saplings, fund the land lease, pay commissions and forester/management fees. The saplings are planted and they start to grow. Initially, the saplings are worthless but as time passes the young trees start to gain in value. Weaker trees will be harvested for paper pulp to allow the stronger trees to become more established. Usually, this first harvest will happen within the first five years. The income the harvested trees return will be passed to the investor as an income payment. The remaining trees continue to grow and all the time they increase in value. Further harvests will take place until the investor is left with high value, strong mature trees.
Please allow me to take you through a scenario. For example, an investor initially purchased 600 saplings. After year 4, 300 trees are harvested (returning £5000 in income). After year 8 a further 105 trees are harvested (returning £15,000 in income). After year 10 a further 68 trees are harvested (returning £20,000 in income). To this point £40,000 had been returned in income.
For argument sake, lets me make the assumption that a mature Melina tree (Gmelina Arborea) is currently worth £250 each and over a 12 year cycle the price increased by 5% per annum, a mature Melina tree would be worth £453 approximately.
Therefore, 127 trees would remain after 12 years and harvested. Returns would be 127 X £453 = £57,531. On this basis the overall return would be £97,531 for an initial investment of… £18,000.
Now what if I was to inform you Gmelina has risen in value 2005-11 on average 17.83% per annum.
As a long-term investment option, various bodies predict strong growth for the timber industry and for the foreseeable future. In the UK alone we use 50% more natural resources per person than what nature can replenish. When you weigh-up the long-term nature of timber an investment today is an interesting option to help secure your financial future and maybe even that of your heirs.
Alternatively, if you are looking for UK Pension investment, forestry may just provide the returns you need to start in building your financial security for the later years in your life.
Whatever way you look at it, investment in timber is a solid financial choice.