Collectables an opaque and unpredictable asset class
Investors who solely focus on a traditional portfolio of equities and bonds may be failing to realize that their passion for art, wine, jewelry or other collectibles could be factored into their overall wealth-management strategy.
Collectibles fall under the category of tangible assets along with precious and base metals, energy, infrastructure and real estate, and exist outside of an account balance or financial statement. They are considered an alternative investment, or a group of assets that do not fall into conventional investment categories. Put another way, alternative investments are not the usual suspects — stocks, bonds, mutual funds and cash.
Alternative asset classes can be important in a wealth-management strategy because they can have little correlation with the stock and bond markets. Some are even countercyclical and could reduce your exposure to overall market risk in a way that traditional strategies cannot.
These items may offer a useful hedge in volatile markets, but investors should work with their financial advisers to determine how alternative assets and collectables could fit within their overall wealth strategy.
You will always walk away with something you love
Collectibles can be appealing because there is usually an underlying interest in the subject of the collection. Whether it be wine, jewelry, art, handbags, coins, stamps or even memorabilia, most people begin their collecting journey because certain objects bring them joy.
This may add to the allure of the investment, but there are also risks associated with collectibles that investors should be aware of.
As with any investment, there are no guarantees on what will appreciate. Because of the diverse nature of collectibles, the price is not always transparent and requires expertise to determine their value. This makes collectables an opaque and unpredictable asset class.
Investors should be aware that unlike much of the financial market, collectibles are not typically traded on exchanges or similar platforms, and there is no overarching authority stabilizing prices or protecting consumers. For every story of a forgotten painting selling for a record price at auction, there are countless other speculative purchases that do not appreciate in value.
Collectables are illiquid in nature and not continuously priced in the same way a stock or bond is. Investors would likely find it considerably more difficult to sell a rare coin compared to 1,000 shares of Apple Inc. stock due to the limited number of buyers. Therefore, before investing, all potential collectors should ask themselves if having the object is enough to justify the cost.
Given the lack of oversight, the world of collectibles can also be subject to fraud. It is critical that budding collectors do their research and ensure they are buying from a reputable source. Thorough research and due diligence will save investors money, and heartache, down the road. Equally, proper record keeping and documentation is key if you plan to sell your collection in the future.
Like any investment, you should formulate a plan to protect your assets from any downside risk. This means considering the long-term maintenance, insurance and tax costs associated with collecting.
The value of many collectibles depends on their condition, so you may need to store your objects in controlled environments. Fine wines, for example, are sensitive to temperature changes and may require special fridges or cellars with climate controls. Stamps may need protective cases and be kept away from UV rays. You may also need to consider additional insurance to protect your collection from unexpected events. Collectibles, like any asset, can also be subject to heavy capital gains, estate or inheritance taxes.
As a result, it is important to consider the long-term goal of your items when formulating a plan for your collection. Have you purchased these pieces with the intent to sell them down the road, or do you plan to pass it onto the next generation? If you hope to pass the collection along, it is important to have an open dialogue with your family to ensure that the next generation is well equipped to handle the associated taxes and maintenance costs.
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Regardless of whether you are just starting your collecting journey, have a large collection or are inheriting a collection from a family member, it is critical to have ongoing discussions with your wealth adviser to account for all the associated details. They can also introduce you to professionals who can help you grow and protect your collection or suggest other asset strategies that may give you the benefit of alternative investments with less risk.
There are many considerations when thinking about collecting. But if you are investing to build a collection in a subject you have an interest in, you will always walk away with something you love.
Diana Orlic is a portfolio manager and wealth adviser at Richardson Wealth.
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