The Fine Art of Investing in Collectibles
If you’re only buying to turn a profit, be cautious.
Fine wine to classic cars, art to hockey cards. Collectibles reflect our interests, values and individuality. A prized collection can be a source of endless enjoyment for ourselves and everyone around us.
But should you add some Chardonnay or Cabernet to your investment portfolio?
A copy of 1938's Action Comics No. 1, the 10 cent comic book where Superman debuted, sold in August for $3.2 million. Eye-popping figures like these grab headlines, leaving the impression that owning rare comic books, antiques and other treasures can be a profitable alternative to stock market volatility and persistently low interest rates.
But for every success story know that many more collectible investments won’t pan out. If you’re an average investor the collectibles market will be unfamiliar ground – tread carefully.
The problem of valuing collectibles
When buying a collectible with the goal of making money establishing a proper value is mandatory, but not easy. What’s that offbeat painting or antique chair really worth? Are you getting a steal or paying too much?
Determining value is relatively straightforward with financial instruments like stocks and bonds. Shares of a blue-chip company will trade continually throughout the day with buyers and sellers setting a market price in real time.
The trouble with collectibles is they can go for extended periods without changing hands making it hard to estimate their value. Consulting firm Arts Economics observes that, on average, a piece of art only returns to the market every 30 years.
Even if you have specialized knowledge or expert help to judge a fair price, valuing collectibles remains subjective so it’s easy to fall into the trap of paying too much, especially for in-demand items. If you do overpay your chances of making money can dwindle. In the end you might not recoup your outlay, let alone earn a respectable return.
The mechanics of the collectibles trade can also work against you. There’s often a wide spread between retail and wholesale prices. As an investor this means you should expect to pay the advertised price when you buy, but receive substantially less if you sell.
Protect Yourself from Autograph Fraud
Fraud and forgery are rampant when dealing in sports memorabilia. How can you help ensure the autograph you’re paying for is the real thing? Certification through an authentication service is one way, as is photo evidence of an athlete adding their name. Still, the best way to be certain an autograph is legitimate is to see the signing first-hand.
What else to consider before you buy
Valuation is a key concern in collectibles investing, but it’s not alone. Consider these factors before you buy.
Changing tastes. If you can find rare, authentic items in above average condition your potential to turn a profit will improve. But unless you have an uncanny ability to predict the next hot trend or what will have staying power it’s tough to turn collecting into long-term investment success. What everyone is clamoring for could be worth next to nothing tomorrow. Buyers are fickle and tastes go in and out of fashion quickly. Remember that prices can fall as rapidly as they rise.
Lack of liquidity. Because many collectibles aren’t actively traded, a buyer might not materialize when you’re ready to sell. You may be forced to price at a steep discount to unload your investment.
No income stream. Bonds pay interest. Many stocks issue dividends. Collectibles don’t produce income. Your only financial return comes if you’re able to sell at a higher price than what you paid.
Irrational exuberance. Emotions can sidetrack sensible investing. This is especially true at auctions where it’s easy to get swept up in the action between bidders. The same discipline you need to avoid jumping into a euphoric stock market applies when seeking out collectibles. Excitement or greed can lure you in at a price top just as the smart money is getting out.
Buyer beware. Markets for collectibles like autographs or art aren’t regulated the way stock and bond markets are. Are you buying the real thing or a slick imitation? Even experts can be fooled.
Physical damage. Mutual funds and GICs aren’t affected by temperature, humidity dents or rust. Owning collectibles carries the risk of value-destroying physical damage.
Extra costs. Collectibles don’t pay dividends or interest, but they can have significant buying, selling and carrying costs. Dealer commissions, auction house fees, insurance, storage, transportation – they all eat into potential profits. Recognize that any gains you make on a sale may mean paying capital gains tax.
If you choose to look past the risks and want to add another dimension to your portfolio the collectibles market is getting easier to tap into.
The internet has made the auction process more accessible to average collectors. Options for indirect investment are also springing up. The burgeoning “wine fund” industry is one example.
Wine investment funds hold a portfolio of high-quality wines, offering an ownership stake without the cost and hassle of setting up a private cellar. While on the surface these investment funds might bear a resemblance to mutual funds, they don’t have to meet the same regulatory standards, and can be illiquid. If you’re considering a wine fund or similar investment it’s wise to seek professional guidance before committing your savings.
Five Collectibles That Have Lost Their Shine
Beanie Babies anyone? Just as clothing, music and hairstyles eventually go out of fashion once-popular collectibles can fall from grace. Collecting expert Kovels Antiques Inc. lists these one-time stars among the crowd of collectibles that have lost their lustre.
- Hummel figurines – younger generations are showing little interest in owning the classic rosy-cheeked porcelain tykes.
- Anything made by the Franklin Mint – coins, plates and other collectibles from Franklin haven’t fared well on the resale market.
- Limited-edition Barbie dolls – with the exception of early Barbies, which can hold considerable value, these toys are frequently stored away as investments and never played with so they remain plentiful.
- Vintage metal lunch boxes – in some cases these once-trendy items commanded thousand dollar price tags. Few now sell for more than $100.
- China sets – collections from Royal Copenhagen, Royal Worcester, Lenox and Wedgwood typically sell for half the price of new china – when they sell at all.
Collectibles as a portfolio hedge
Like gold and real estate, collectibles are tangible rather than paper-based assets. So are they a smart way to protect your portfolio from stock market dips?
Based on the performance of the Liv-ex Fine Wine Investables Index – a benchmark tracking the high-end wine market – collectibles won’t necessarily pass the test. In the fall of 2008 when the value of many assets dropped sharply the Liv-ex followed suit, pulling back over 20%. Another complication is during financial turmoil interest in collectibles can dry up. For Sotheby’s, a leading auctioneer of fine art and antiques, revenue fell 47% during the financial crisis as trading activity plunged. A scarcity of buyers makes it difficult to realize fair value for anything you hold.
The bottom line is collectibles shouldn’t be looked to as “insurance” for a traditional investment portfolio. Sticking with a properly selected, diversified investment mix that includes equity, fixed income and cash remains a time-tested approach to grow capital, provide income and control risk.
A place in your portfolio?
The joy of owning collectibles can be its own reward. Turning that passion into a sound investment is a different matter.
Investing in collectibles has more than its share of uncertainties. That’s why for most investors collectibles should represent no more than a niche holding in a portfolio. When it comes to your wealth, don’t take chances. Speak with your BlueShore financial advisor and find true value in investment options that fit you best.