By Peter Mastrantuono
Over the last ten years, rare whisky has appreciated 564%, while art rose 141% in value and coins gained 175%, according to the Knight Frank Luxury Investment Index. Investing in collectibles, art and autos can help diversify an investor’s portfolio, but are they an asset class in which the average investor can participate? Increasingly, that answer is “yes.”
The Appeal of Collectibles
Investing in collectibles, such as wine, autos or stamps, for many people, appeals to their individual passion or desire to be connected with the exotic or different. It’s an asset that creates excitement and builds social networks among other like-minded collectors. More directly said, investing in collectibles can be fun.
For others, it’s all about the opportunity to generate long-term profits in an asset that helps them diversify their investment portfolios, using the same data-driven, analytical approach they take with other investments.
New Ways to Invest in Collectibles
Until now, investing in high-end collectibles, like a Van Gogh or a 1962 Ferrari GTO 250, has been out reach for the average investor. In recent years, however, new investment platforms have emerged, creating the opportunity for Main Street investors to participate in these markets at very affordable entry points. The way these platforms work is quite simple: the company that runs the platform purchases a collectible (e.g., artwork, car or baseball card), securitizes the asset and then makes shares available to investors, much like any new business going public on the NYSE or NASDAQ.
One such company is Rally Rd., in which individuals through the company’s app can buy fractional ownership in cars, rare books, watches and sports memorabilia, including a 1910-era Honus Wagner baseball card.
Otis, another app, offers ownership opportunities in contemporary art, sneakers and other collectibles, while Masterworks focuses on blue-chip artwork.
Minimum investment amounts will differ from app to app, but tend to range from as low as $25 to $1,000.
Investors generally have two exit strategies. They can sell their shares in the secondary market, though they should not anticipate a very liquid market for their shares, or their investment is returned when the underlying asset (painting, car, etc.) is sold.
If individuals are interested in making collectibles a part of their investment portfolio, it is critical that they educate themselves on an artist or collectible niche, as well as the dealer or source of the item. The collectible market has its share of scams and counterfeits, so buyers need to be smart about what and from whom they purchase collectibles.
Interested investors should also be aware of the high costs of buying and owning collectibles, which can detract from the investment performance. For instance, the spread between the price at which a collectible is bought and sold can be quite substantial. In addition, transaction commissions, storage expenses and insurance costs can be high.
Lastly, the ability to sell a collectible is quite different than a stock or bond. Finding a buyer is more difficult and the valuation of a collectible is much more subjective.
Advisors will have different opinions on investing in collectibles, but it is generally agreed that such investments should not exceed 5% of an investor’s overall financial net worth. Individuals may want to talk to a financial advisor about collectibles and whether it makes sense in light of their financial circumstances and objectives.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.