Earlier in this series, I discussed investing in Farmland, Rooftop Solar System, and Private Equity as alternative investments. Alternative investments can provide lucrative returns that are unavailable by investing via stocks and bonds. In this version we look at another Alternative Investment – Collectibles.
A Collectible is any physical asset that appreciates over time. The rarer the collectible item, the more valuable it is and can vary widely depending on the field. For someone to invest in a collectible, an in-depth knowledge of the subject and a good eye is necessary. Luck also plays a huge part in the investment as some characteristics of collectibles can be out of one individual’s control. It is also common for some people to simply collect items that interests them and captures their attention, and not necessarily consider the collectible as an investment. But this interest and collection over time can turn into an investment portfolio, of sorts.
Alternative Investments – Collectibles
So what are some types of collectibles? As mentioned earlier, collectibles can be any physical asset. Some of the common ones include art (one of the favourite collectible items for the wealthy), cars, wine, stamps, coins, minerals, toys, books, antiques…you name it! There are advantages and disadvantages with collectibles, esp as an investment.
- Potential for gains is high
- A collectible can provide a great hedge against inflation
- It is possible to find a gem that is very rare in unorthodox places. Stories of someone coming across a collectible found in the attic, garage sale, etc are all too common.
- Low correlation to the traditional markets – such as the stock market or bond market; in essence, a great alternative investment
- Tax advantage – it is easier to pass on the collectible to your heirs and is considered a “wasting asset”, without being taxed in your estate in the inheritance.
- Counterfeits – One of the biggest problems with collectibles is the possibility of ending up with a counterfeit piece or other counterfeits in the marketplace.
- Not liquid – a collectible by definition is a physical asset that an investor needs to hold for the value to appreciate over time. As such, the investment is not liquid.
- Does not provide income whatsoever
- Time is an important factor – investors have to usually wait a very long time to find out if the investment was worth it.
- Wear and tear – this is a big one and investors sometime need to take care trying to keep a collectible in pristine condition to minimize wear and tear.
- Some factors may be out of control – an item can be valuable, but if its not rare and commonly available, the price will not appreciate at all or enough. A growing rarity over time is desirable – which ties in with the ‘wear and tear’ above.
- Its hard to figure out true value – it is only as good as the next investor who wants to invest in it.
- Markup – when going through a dealer, a huge markup is included, since the true value is usually subjective.
- Tax disadvantage – a tax has to be paid when finally selling the collectible – there is no way to protect the asset by using tax-advantaged accounts such as retirements accounts etc.
Collectibles can be a lucrative form of investment and the potential for gains is high if rightly chosen. Collectibles can provide with a lot of advantages over traditional forms of investment, but also come with risks, some of which may be out of control. Due to this reason, to have a collectible investment pay-off may require both a good eye/idea for investment in addition to luck. Do you collect anything? Do you consider that collectible an investment? Share your thoughts below.