Collectibles may have potential for financial gain, but they come with significant drawbacks compared to other investments.
What comes to mind when you hear the word investment? Maybe stocks, bonds and CDs? What about collectibles? Collectibles as an investment vehicle have been getting more attention lately, with some folks touting them as a hedge against inflation. Like all investments, there are opportunities for financial gain as well as risks. Here’s a quick overview of how collectibles work and what to consider before you invest in them.
What’s a collectible?
Let’s first distinguish between two types of collectors: hobbyist and investors.
Hobbyists tend to collect more than they sell, if they sell at all. They collect because the items excite and interest them. Collectibles may be a way to learn about a certain topic—like history or sports—or a way to connect with others with a shared interest. Collectibles might also be a way to leave something meaningful to heirs.
Investors may also have passion for the items they collect but their goal is to make money. The investment can be made several ways: as an individual, as a dealer, through a managed fund that offers fractional shares of things like art or through a company that holds assets like barrels of whiskey.
This article pertains to collectors who are investors.
Now let’s look at what’s considered a collectible. The IRS defines collectibles as tangible property that includes works of art, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. Some NFTs (non-fungible tokens) may also be considered collectibles.
Costs related to collectibles
When evaluating collectibles as an investment, there are costs to consider in addition to the purchase price. These include:
- Insurance—Homeowners insurance usually has a low limit for collectibles or may exclude them. To be covered against losses due to theft or damage, you’ll need additional coverage. You may also need to pay for an appraisal of the items to show the insurance company the value of the goods.
- Storage—Many collectibles deteriorate when exposed to heat and humidity. Climate controlled storage and acid-free packing materials may be needed to preserve items. If you don’t have space at home for collectibles, renting a storage space might be needed.
- Security—Collectors may want a safe and/or security system to protect against theft.
- Transaction fees—Parties who help facilitate sales, such as a dealer or eBay, charge a fee for their service.
- Taxes—When sold for a gain, capital gains taxes are owed. Rates vary based on how long the item is held but they could be as high as 28%. (Losses may be claimed if the collectible was not used for personal use.)
The list above covers out-of-pocket costs. Another thing to consider when buying collectibles is the opportunity cost. If your money is tied up in collectibles, what other investments—or opportunities—must you forego?
Other considerations with collectibles as an investment
In addition to expenses, there are other factors to account for when investing in collectibles.
First, beware of counterfeits. Research the product and learn what distinguishes authentic goods from fake ones before you buy.
Another consideration is that the value of collectibles can be quite volatile. One needs to keep vigilant watch on markets to buy low and sell high. Even so, there’s no sure way of timing a sale just right.
Also, keep in mind that the collectibles are not as liquid as many other types of assets. If you want fast cash for a collectible, you may end up selling it for far less than it’s worth. Buyers want time to authenticate goods and do their own appraisal. Plus, the higher an item’s value, the fewer people there are who can afford it; it can take time to find a buyer.
How collectibles compare to traditional investments
It’s true, a comic book may sell for $2 million or a painting for $250 million, but these are rare cases. There are millions of closets and basements all across the land filled with collectibles worth little and that show little promise of gaining in value. In contrast, the average annual return on S&P 500 index over the last ten years has been 11.7%.
It’s also true that some people generate income regularly buying and selling collectibles. However, fortunes are determined by the whims of buyers along with the rising and falling popularity of particular items. While the stock market may have a down year, over time it trends to higher value.
Additionally, compared to stocks which pay dividends and bonds and CDs that pay interest, collectibles fall short as they produce no income until they’re sold.
Balancing investments
Collectibles have their pros and cons, and financial advisors suggest that if you do jump into this market limit your investment, perhaps just 5% or 10% of your total portfolio.
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