Forestry and timber investing – the very concept seems either dull or extremely alien to most people. After all, its’ much more satisfying to follow the rest of the herd and chase the latest hot social networking stock. However individual investors – especially those looking for diversification and stable returns – are making a real oversight by ignoring the value timber investments could bring to their overall portfolio.

There are a number of factors that make timber and forestry investments attractive:

• First, as a “hard asset,” timber investments are an excellent hedge against inflation.
• The returns on timber investing have been quite impressive. According to the National Council of Real Estate Fiduciaries in the United States (NCREIF), timber returns since 1987 through 2010 have averaged 15% a year, whilst the main US stock index the S&P 500 has gone up only 9.1% annually. Furthermore, on average the price of harvested timber itself has gone up 5% per year over the last 100 years.
• Timber investments also perform extremely well when stocks are in a Bear Market. For example, in 2008 when stock indexes lost as much as 40 – 50%, the NCREIF’s main timber index actually went up 9.5%. As another example, during the Great Depression when stocks fell anywhere from 70 – 90%, the main US timber index went up 233%. The returns on forestry and timber investments are not correlated to the returns provided by stocks and bonds, which means that they provide true diversification.

The challenge with timber investing, however, is whether it can be done in a truly sustainable fashion or not. Some of the statistics are truly frightening. Clearly, the world’s forests are steadily shrinking. There was an estimated 90,000 sq km per year lost in the 1990s, to the point where half of the world’s forests that originally covered approximately 46% of the planet are now gone.

Tropical deforestation in particular – primarily caused by the attractiveness of tropical hardwood timber – is the highest in the world at approximately 130,00 sq km lost per year. (This data is from the United Nations’ Food and Agriculture Organization/FAO). According to this pie chart based on figures from the FAO, approximately 17% of this tropical deforestation occurs in Asia, 4% in Myanmar, and 31% in other tropical countries, many of which are in SE Asia.

The loss of our tropical forests are a true human tragedy. Scientists believe that as much as half of the species on the planet live in tropical forests, and many of these species may have not even been discovered yet. Tropical forests also store vast amounts of CO2, and when they are cut-down, that CO2 is released into the atmosphere.

On the demand side, global lumber use is expected to double in the next 30 years, and China is on track to replace the US as the biggest consumer of wood in the world. Unfortunately, the demand for tropical forestry timber is causing severe environmental degradation.

The question is, are the attractive returns on order from tropical timber investing in irreparable conflict with concern for our environment? Luckily for investors, the answer is no. Timber investing does not have to mean large-scale destruction of native tropical forests. Managed forestry with tree stocks carefully controlled within specially designed plantations is an extremely sustainable way to benefit from the advantages of timber investing. The plantation owner will tend to growth of trees, and then harvest them in a sustainable fashion, without touching any tropical or other native forests.

There are now an increasing number of tropical forestry investments that are easily accessible by individual investors and are also extremely environmentally friendly. For example, Bamboo Investments produce extraordinary returns with dividends of 8-10% paid in only the second year and then rising from there. From an ethical perspective, bamboo absorbs carbon dioxide at a phenomenal rate – an acre of bamboo will absorb 40 tons of carbon dioxide in a year.

So, if you are looking for an investment that is both ethical and green without sacrificing performance, bamboo is one very good option to consider.

Photo Credit: Some rights reserved by ednl on Flickr