The collectibles market has grown in popularity in recent years. Although many people already have them in their portfolios, alternative investments tend to rise when the stock market isn’t performing well. Unfortunately, some investors make the mistake of thinking they can dive in without a plan and turn a profit right away. However, the key to collectibles is recognizing what makes them valuable. So if you are thinking about buying alternative assets, you should consider these 10 pros and cons of investing in collectibles before making any large purchases.
What’s Considered a Collectible?
The term collectible includes a wide variety of items whose value is more than the original purchase price. However, when it comes to investing, the most common types include wine, art, cars, antiques, jewelry, watches, coins, books, stamps, baseball cards, toys, and comic books, to name a few.
These items appreciate for many reasons. For example, an item may become more valuable due to its age, condition, rarity, or appeal. You have probably read about some collectibles selling for millions of dollars. Although not all hold this much value, unique items can fetch a high price at auction.
Many investors choose alternative investments like collectibles because it offers high returns and greater balance within their portfolios. But be warned, it could take years to see any profit. Therefore, investing in collectibles isn’t the most practical strategy for every investor.
10 Pros and Cons of Investing in Collectibles
Before investing a large amount of money in collectibles, you should consider these pros and cons and weigh them against your current investment strategy.
The Profitable Side of Investing in Collectibles
1. Collectibles can become valuable assets.
Without a doubt, the right collectible will bring significant gains. Although there is high variability depending on which type of collectibles you focus on, there are certain types that tend to perform better than the stock market.
For example, when you look at the period from 1995-2021, contemporary art performed extremely well. The S&P 500 had an average return of 7.89%, which came to 10.48% with dividends. Meanwhile, contemporary art had a return of 13.8% over the same span of time. With results like this, it’s no wonder why collectibles have become an attractive investment.
On the other hand, there are no guarantees. But, getting expert advice and professional assistance can help you find quality pieces that will match or outperform the markets.
2. There is potential for huge returns.
We have all read the stories of people who discovered heirlooms that have been long forgotten or came across valuable items in local thrift shops and yard sales. Although it rarely happens, there is the potential of discovering something valuable that others have overlooked. And, there is always the slight chance of identifying collectibles that will become huge returns in the years to come.
While it is a one-in-a-million chance, these things can happen. And those who are extremely lucky may end up with something truly priceless.
3. It adds more diversification to your portfolio.
Any financial advisor will tell you that diversification is an important method to mitigate risks and protect your assets against stock market fluctuations. Index funds already have this built-in. But, it’s wise to have assets that aren’t correlated to the stock market. Collectibles are one way to create greater diversity and a more balanced investment strategy. And, they ensure you don’t put all your proverbial eggs in the same basket.
4. Collectibles can be passed on as generational wealth.
Unfortunately, many collectors don’t collect on the financial gains from their investment. Instead, they use it to create generational wealth that they can pass on. If their family chooses to keep the asset, it allows for further appreciation and even greater gains. Adding collectibles to your portfolio can give you and your family more resources and options.
5. It can fulfill a passion.
If you decided to start investing in collectibles, then you should choose something that you already have an interest in. Serious collectors spend years researching, networking, and learning about anything related to their collectibles. The most successful people usually choose a specific niche or passion they are already familiar with. Not only can it bring great personal satisfaction, but also financial returns.
…and the Risks
1. It’s a volatile market with several factors affecting value.
On the other side, investing in collectibles comes with significant risks. First off, it can be a very unpredictable, even volatile market. Demands can quickly change and items that once held valuable can depreciate overnight.
Furthermore, it’s a highly subjective market. Since there is no standardized valuation or index like there are with stocks and bonds, their value is difficult to gauge. Although we have access to more resources to compare items and prices, some pieces are one of a kind. Expert appraisals can give you an estimated value. But ultimately, collectibles are worth what people are willing to pay.
2. Quality items cost money.
Although we read about it often enough, people rarely find old junk and then turn around and sell it for millions. This isn’t how collectibles work. Most people know the value of what they have.
To earn a profit, you have to know the market and invest in quality items. Then, there are the additional costs for handling, storage, and insurance. But when it comes to the quality of collectibles, you get what you pay for.
3. There is always the potential for counterfeits.
Counterfeits and forgeries are inherent risks with collectibles. No matter what you are dealing with, you will always have opportunists who try to take advantage of the naive.
Even to a trained eye, the work of some of the most skillful con artists is difficult to distinguish from the original pieces. If you decide to delve into collectibles, always ask for authentication and go through reputable dealers so you don’t waste your time and money.
4. Collectibles come with a heavy tax burden.
Another thing that investors often forget is the tax burden that comes with collecting. When you add them to your portfolio, spend some time familiarizing yourself with the tax laws for collectibles. Depending on how long you own them, you may have to pay up to 28% in capital gains tax when you sell them.
5. They may never bring a return on your investment.
With most collectibles, getting a good return on your investment takes time. It may be decades before a collectible appreciates in value. In the meantime, if the items are damaged or destroyed, you may never see the profit. Additionally, some items will never be worth much more than you paid for them. So be warned, it may be a gamble that never pays off.
The Takeaways of Investing in Collectibles
Many investors have successfully built valuable collections. However, the fact that collectibles aren’t tied to the stock market is a double-edged sword. When you look at the numbers, collectibles tend to perform better than the stock market over time, but you have to wait for the return.
While there are both pros and cons of investing in collectibles, it isn’t for everyone. It’s better suited to long-term investment strategies. Like any investment opportunity, it will always carry risks. But without the risk, there is no reward.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.