I’ve always thought that IRAs were pretty sexy. Being able to invest money in an account that grows tax-free, with tax-free withdrawals on all of the gains (as in the case with qualified distributions from a Roth IRA) is an extremely generous incentive to save for retirement. Pretty sexy, until The Wall Street Journal burst my bubble and told me that IRAs Get Sexier.
If the selection of stocks, mutual funds, ETF’s, bonds, and CD’s weren’t mind boggling enough for you. Investors can add metals, natural resources, farms, private equity, and mortgages into their IRAs. You can even invest in trees if your heart desires. Yes, I said trees.
… a return of more than $250,000 on each $7,500 investment for a lot of 100 trees over the deals’ 25-year life cycle—an average annual return of about 15%.
– The Wall Street Journal
I was at work when I read this article and I nearly had to pick my eyes up off the ground. Was what I read in the paper true? Why would anyone share such an investment to the world? Hell, I could plop down thirty grand and become a millionaire!
As soon as I got home that day, I powered up my computer and searched for “koa tree investment” to see what would come up. The first two search results were for websites that led to the exact same page. What really caught my eye though, was a research report warning of the limitations of koa wood investing. The report from the primary author can be seen below.
What You Need To Know About Investing In Koa Trees
- You have to be a “qualified investor.” This means that in order to invest in Hawaiian koa trees, you need to have an income of more than $200,000 a year. Even if you have $7,500 ready to invest, you can’t buy any trees unless you meet the income threshold.
- There is not a lot of information about koa tree investments available. The most informative resource I was able to find about koa trees was the research report and related video. Nothing positive about the outcome or proven investment returns was readily available. This leads me to believe that the only information regarding returns was from the estimation given by the organization itself. The estimation of the potential return is clearly debunked by the study which explains that plantation tree growth varies widely.
- The yield and suitability for lumber highly depends on straight stem form. This means that the trunk must grow tall and straight in order to be harvested for usable lumber. There are many factors that cause koa trees to have poor stem form, but the bottom line is that few of the planted koa trees will ever produce the returns that are anticipated.
- Is it right for you? Successful investors who hold alternative investments in these types of IRAs (self directed IRA investments) are often closely involved in the business. They are fully aware of the risks and understand the day to day operations that take place in the business. If you are not 100% clear on the risks of investing in koa and understand how you stand to make money from it, you should pass.
- What is the time frame you require for your investment returns? Koa tree investments are not liquid. In other words, trees are not easily sold. You can’t just log into your account and replace koa wood with an index mutual fund. If you invest in koa, you’re in it for the long haul.
- What’s your trade off? If you get locked into a koa investment for 25 years and produce no marketable wood, you will have lost the opportunity to invest the same $7,500 in something else. Assuming an 8.0% return, over the same time period with no additional investment, your $7,500 would become $51,364. A paltry amount compared to a quarter of a million dollars, but much more attainable and realistic.
So, in the end, my sexy Roth IRA is going to have to be sexy enough. I’m going to have to learn to live with my index funds and stop looking elsewhere to spice up my life. I hope my IRA will learn to forgive me and know that I’ll be dedicated to it for the long run, no matter what. I promise to feed and maintain it on a regular schedule so that it will be there for me when I retire. I’m looking forward to the golden years when my IRA and I aren’t quite so sexy anymore, but provide each other with the things we need…and maybe a little travel.
The research paper written by Paul G. Scowcraft et al. can be found here.
More about the Koa (Acacia koa) ecology from the USDA.