Low volatility on paper, and a tract you can't sell in a hurry

Question

The number everybody quotes for timberland is a standard deviation around 6.9 percent against almost 16 for the S&P, with long-run annualized returns near 10.7 since the index started in 1987. On my side of the fence I own small apartment buildings, and volatility isn't what has ever hurt me. What hurts is a boiler in February when the account is thin.

So I want to argue this out. One view says low volatility is the whole point. If you're unlevered and nobody can force you to sell, a smooth value line means you never get marked down at the exact moment you need money, and trees keep adding volume through a recession whether or not anyone is bidding.

The other view says smoothness on a tract you can't move for six or nine months is a comfort, not a protection. The price you'd actually get on a fast sale isn't the appraised one, and a small owner with one parcel has no diversification inside the asset at all. Timing flexibility only helps if you can afford to wait.

I genuinely don't know which side I land on, and I'd rather hear the room split than talk myself into one.

diane_kowalski · Answer

cairn, the part that decides it for me is who holds the debt. Low volatility protects a lender's collateral position more than it protects you, because the lender is the one who cares about a mark. If you're paying cash and the plan is a twenty year hold, the volatility figure is close to trivia. You'd never sell into a bad bid anyway, that's just the harvest deferral logic applied to the whole asset.

Where I think it does matter for a small owner is estate and partnership math. When two of three partners want out, somebody has to name a value, and an asset class that doesn't swing 30 percent in a year makes that conversation less ugly. I've watched a family fight over a parcel priced off a hot year and it never really ended.

Low volatility on paper, and a tract you can't sell in a hurry

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