From annuities to zero-coupon securities, the variety of financial instruments in which investors may choose to protect and grow their money is seemingly endless. But beyond the mainstream financial markets, there are alternative investments to consider, such as collectibles, which range from art, rare coins and historical artifacts to antique toys, comic books, sports memorabilia and more.
Like any other investment, whether or not you should put your money into collectibles depends on your objectives and how much money you’re willing to part with if the investment doesn’t pan out.
Why Buy Collectibles?
As a general rule, collectibles include any physical asset that is likely to appreciate in value because it is rare or widely desired. The idea behind investing in collectibles is that investors will gain a physical asset, which they can use, transport or store while waiting for its value to (hopefully) increase over time.
While many collectibles never appreciate in value, some perform quite well.
For example, a 1940 copy of Batman No. 3 (featuring Catwoman) sold in May 2013 for $40,332; and, while baseball cards from the 1980s on have fared poorly, fans continue to pay top dollar for baseballs signed by legendary players, such as Ty Cobb and Babe Ruth. Items owned by classic Hollywood stars, such as Liz Taylor or Marilyn Monroe, also tend to appreciate over time.
Advantages to Owning
The strongest argument in their favor is that most collectibles tend to increase in value right along with inflation.
Portability is another advantage, particularly during times of political and economic turmoil. If things heat up, you can always take it with you.
Also, collectibles are global investments. You can trade them anyplace a demand exists.
While stocks, bonds and other traditional investments are just numbers in a digital account, collectibles allow you to enjoy them while waiting for their value to appreciate.
However, investing in collectibles comes with a significant amount of risk.
Risks to Owning
In the case of art or rare coins, where individual pieces can be quite expensive, you may have to make a significant investment—perhaps more than you would normally put at risk on any single purchase. Doing so, of course, increases your investment risk.
And collectibles are subject to volatility, due to supply and demand. Illiquidity is another significant risk because if demand for a given item drops off, you may have a tough time selling it.
But the biggest risk with collectibles is the knowledge gap. Most people simply have no idea how to value collectibles—and con-men are everywhere in this market.
In addition, collectibles, unlike stocks or bonds, don’t provide any income while you hold them. Nor do they offer any tax advantages. You’re banking 100 percent on capital appreciation.
For all these reasons, collectibles are not at all suitable as retirement investments.
How to Trade
At the high end of the market, you would primarily buy and sell art, coins and other expensive collectibles through established auction houses. It’s their job to verify the authenticity of the items.
However, many lower to mid-range collectibles can be purchased and sold through ordinary channels, such as flea markets, antique dealers, garage sales, and online auction sites.
Expect the value of any given collectible to differ (sometimes significantly) from place to place, based mostly on supply and demand—and understand that the true value of a collectible is usually hard to determine.
The challenges don’t end there. For example, if you’re buying from a dealer, you can expect to pay a mark-up, which may dilute any return you receive upon selling the item.
You’ll also have to cover the maintenance charges associated with caring for the collectible, since it will need to remain in pristine condition if you hope to sell it in the future at a profit. These costs could be low or high, depending on the item.
Remember that, above and beyond basic maintenance, you may also need to have appraisers, restorers and dealers look at the collectible before you sell it—and, again, these costs eat into any potential profit you might hope to see upon selling.
Then there’s wear and tear to think about. You may do your best to preserve your collectible’s full glory, but accidents happen—and the slightest crack, scratch or tear can easily cause the value of your item to plummet.
Something else to keep in mind, especially at the higher end of the market: forgeries and counterfeits are extremely difficult to detect. Even well established appraisers can miss the signs, so you need to allow for the possibility that you could end up buying a fake and losing your entire investment.
Finally, you need to consider the opportunity cost—what you opted not to invest in so you could buy your collectible. The fact is, most collectibles don’t come anywhere close to outperforming the S&P 500. Stock market index funds, money market accounts and most bond funds all tend to outperform collectibles over time.
For the vast majority of investors, collectibles don’t represent a sound investment.
That doesn’t necessarily mean you should never buy these items, just that you should view them as purchases to be enjoyed more so than investments that will appreciate.
And if they should happen to increase in value over the long term, all the better.