Collectibles are considered an alternative asset class, in that they’re not stocks, bonds, cash, or other similar financial investments. Collectibles are assets that increase in value over time, due to either popularity or rarity. Collectibles are often sold for more than their original purchase price. Collectibles can be an interesting alternative investment to consider adding to your portfolio.
Considerations and risks of investing in collectibles
It is important to understand the aspects and risks associated with investing in collectibles.
- Valuation uncertainty: Unlike traditional financial instruments, with consistent and unanimously understood market valuations, the value of a collectible can depend on various factors, such as the overall demand and supply at a given time as well as the physical condition of the asset being valued. The valuations of collectibles remain largely subjective, and it may be beneficial to consult various experts when buying or selling in this space.
- Lack of income: Collectibles are a type of alternative investment that does not provide income from holding the investment. Traditional investments like bonds will pay interest, or stocks will pay dividends. This is not the case with collectibles. The only way for an investor to realize a return from this investment is to sell it for a higher price than what they obtained it for.
- Illiquid investment: Collectibles are illiquid investments. This means that they are not cash and require significant effort to convert into cash.
- Additional costs: There are significant costs associated with buying and selling collectibles – commissions, auction fees, insurance, storage costs, and transportation costs. Also, there are tax implications upon the disposition of the asset, such as capital gains tax, which varies by jurisdiction.
- Physical asset: Collectibles are physical assets, and as such, need to be properly cared for, stored, and protected. The physical condition of the asset will determine the value. The more pristine the condition, the higher the asset value. Wear and tear can reduce the value by a significant amount.
- Less regulation: Investing in collectibles is not regulated and it is vital to undertake due care and diligence to ensure what you are buying is not misrepresented by the seller. Watch out for imitations and fakes.
Common collectible investments
Investing in collectibles can be an effective hedge against the volatility and movement of traditional investments. However, it is important to understand the key risks and other considerations in this space. You should pursue this type of investing if you are passionate about the items that you are collecting, and are comfortable facing challenges that this type of investing may present.