A Guide on Investing in Collectibles

A Guide on Investing in Collectibles
RICHARD MILLE, RM055 RG-CA TPT ‘BUBBA WATSON’, AN ATTRACTIVE GOLD, CARBON-COMPOSITE AND DIAMOND-SET WRISTWATCH, Price Realised USD 302,400 Source - Christie's

Collectible investment benefits

Collectibles can diversify an investment portfolio and act as a potential hedge against inflation. Research has shown that fine art can function as a risk-reducing element in a portfolio due to its low correlation to equities or bonds. Furthermore, it's a real asset, which provides a hedge against inflation​ based on Barclays ‘For love or money: investing in art article’​. Collecting items of personal interest can also bring emotional and intellectual pleasure​​. Furthermore, collectibles can foster connections with people from different walks of life, helping to form vibrant friendships and enrich communities intellectually and culturally​​.

Collectibles have shown promising returns, with returns on art growing by 78% between 2007 and 2017​​. However, the factors that can influence returns are diverse and include the rarity, condition, and desirability of the item. The average return on an an artwork can vary widely, influenced by factors like the artist's reputation, production costs of the artwork, and the number of pieces the artist has created​​.

Best Collectibles to Invest In

"Six of today’s most collectible luxury items" from HSBC Private Banking suggests that wine, whisky, and handbags are among the most highly sought-after collector’s items today. The value of fine wine increased by 13% during 2020, and 127% over a decade. Rare whisky, or ‘liquid gold’, has seen a 478% growth in value over the past decade. In 2020, handbags knocked whisky off the number-one spot of luxury collectible investment items.

Return on Investment and profitability from collectables

It all depends on what you are buying in that specific category as well as external factors like market conditions. We can give some general ROI based on our research for the following categories below:

  • Art - 8% compounded annual market growth (from 1993-2009).
What you need to know when looking to invest in art
Discover why art is a valuable investment. This resource provides essential research for investing in art and building a diverse portfolio.
  • Wine - Depends on the wine which can range from 11% p.a up to 30-40% p.a (data gathered from 2021-2022).
Report analysis on wine investing and it’s performance
Wine investments: Burgundy and Champagne surge, Bordeaux more restrained. Counterfeit wines, storage costs, Chinese influence.
  • Watches and Jewellery - Single digit returns (data gathered from 2020-2021).
  • Handbags - 11% and up (data gathered from 2021-2022).
A collectable with strong performance against inflation
Luxury bags, especially Chanel handbags, offer inflation protection and strong performance, driving price increases and thriving resale market
For more specific insights you are more than welcome to join us as a member and unlock more granular analysis and reporting.

Disadvantages of collectibles

Despite their potential benefits, collectibles come with unique risks, including lack of liquidity, potential for forgery or fraud, and significant carrying costs. There are also additional costs beyond purchase, such as storage, care, auction or broker fees that can affect profitability.

Tips on investing in collectibles

To make informed decisions about collectible assets, BNY Mellon Wealth Management recommends the following best practices:

  1. Consider alternative asset classes for diversification purposes, as the carrying costs and volatility of collectible investments can limit their effectiveness as diversifiers. Exploring financial alternative asset classes with low correlations to traditional investments, such as managed futures, commodities, or absolute return strategies, may be more advantageous.
  2. View collectibles primarily as a hobby rather than a means to make money. While their value may appreciate over time, it's important to consider additional costs beyond the purchase, such as storage, care, auction fees, or broker fees. Any financial gains should be seen as a bonus rather than the primary objective.
  3. Maintain a detailed inventory of collectibles, including important purchase details, such as origin, price, and distinguishing features. Provenance, a clear record of ownership history, significantly impacts the value and resale potential of collectibles.
  4. Preserve the value of your collection by taking steps to protect and safeguard your collectibles. This includes purchasing specialized insurance, obtaining appraisals from certified experts, and arranging proper long-term storage, whether in a professional facility or at home.
  5. Consider the value of your collection in wealth and estate planning. Neglecting to account for collectibles when making financial decisions can have significant consequences. Recognize and incorporate their value as you would with any other financial asset.
  6. Explore the option of donating your collection to a charitable organization. This not only supports causes you care about but can also provide substantial tax deductions. Certain collectibles, such as art, classic cars, or sports memorabilia, may be suitable for donation to museums. It is advisable to discuss the donation and draft a gift agreement with the recipients to ensure the donation aligns with your intentions and entitles you to the appropriate tax benefits.
  7. Remember the non-financial benefits of collecting. Apart from the potential financial gains, collecting offers opportunities for personal enrichment, curiosity, and connections with others who share similar interests. These intangible benefits can be highly rewarding and should not be overlooked.

What percentage of net worth should be in collectables?

The percentage of net worth to be invested in collectibles can vary based on individual financial situations, risk tolerance, and personal interest in collectibles. Given the unique risks involved in collectible investments, they should likely make up a smaller portion of a diversified portfolio.

In a report done by Deloitte using art as an example, they indicated that paintings in a diversified investment portfolio may be beneficial, but only as a small portion, comprising around 5% to 10% of the total assets. So this approach could potentially be applied to other collectables. Deloitte also mentioned that a wealth driven approach assumes that HNWIs (High Net Worth Individuals) have allocated 5% of their wealth to art and UHNWIs (Ultra High Net Worth Individuals) have allocated 10-15% to art.

Conclusion

while investing in collectibles can provide both personal satisfaction and potential financial gains, it's essential to be aware of the unique challenges involved. Readers should seek professional advice when making significant investment decisions.

Sources:

Six of today’s most collectible luxury items - HSBC Global Private Banking
The global collectibles market is estimated to be worth $372 billion and is poised to reach $522 billion by 2028.
For love or money: investing in art | Barclays Private Bank
Many buy art for pleasure, but its value as an asset class is growing. Read about this year’s Art Monte-Carlo, growing trends and reducing investment risk.
Art investment - Considered as an asset class | Deloitte Luxembourg
This article discusses art as an asset class and why art investments are attractive in the long run
Are Collectibles a Good Investment? | BNY Mellon Wealth Management
Collectibles offer investors an opportunity to combine their passions with potential for financial return. Read on the unique risks involved before getting started.

Read more