Collectibles are rare objects manufactured or handcrafted with a uniqueness that some individuals appreciate and desire. Collectibles include fine art, classic automobiles, rare stamps, old coins, etc.
Collectibles as an investment have experienced growth in the wake of adverse markets in the early 21st century. As investors began to believe that traditional asset classes would not deliver risk-adjusted returns at the levels observed in the 1990s, the search for collectible assets increased.
What are the Essential Features of Collectibles?
Investing in Art items has traditionally been the realm of high-net-worth individuals. It has long consisted of building a collection and bequeathing it through an estate or selling it. However, a boost to investing in Art items has come into the mainstream with the launch of the Fine Art Fund. This fund requires a minimum investment of USD 250,000 and a ten-year maturity. Some other funds invest in other antique and precious collectibles like fine wines.
Several elements must be considered before investing in collectibles. First, investing in collectibles entails high costs. Auction fees can range between 10-15% of the price, and appraisal costs, collection maintenance, insurance, storage, and transportation add to the charges.
It is also important to note that collectibles generate no income but focus on capital gains. Collectibles are illiquid, and rapid selling may entail significant losses over the purchase price.
Collectibles such as Art items also face unique risks, such as the popularity of the artist and the role of a particular piece in the artist’s career. However, from an asset allocation point of view, a benefit is that collectibles offer low correlations with bonds, stocks, and other financial assets. Hence, investors should look to collectibles to diversify a portfolio considering it a long-term investment.
Risk and Benefits of Investing in Collectibles
|Illiquid markets||High consumption value|
|Pure capital gains play; no income generated||Potentially high price appreciation|
|High appraisal, maintenance, and other costs||Lower correlations to traditional asset classes(diversifier)|
|High transaction costs||Illiquid markets with inefficiencies|
|Risk of fraud and copies||Rare collectible’s skills and knowledge may translate into significant gains|
Conclusion: Invest in Collectibles for Pleasure and Pride
Collectibles provide non-financial benefits relating to consumer values. For example, art offers the holder personal pleasure, and its value may vary significantly from one individual to the next. Collectibles could be seen as a satellite investment complementing core portfolio positions.