By Dr. Charles Patterson, WCI Columnist
In the quest for diversification, one stop along the path is at the altar of collectibles. It's here that one finds precious metals, such as gold, silver, and platinum; jewelry and coins; and a whole host of more niche products such as stamps, cars, toys, watches, guns, and books. The hunt for rare finds and curiosities can be a source of great enjoyment with collections accruing as much sentimental value as they do monetary worth.
But the possible utility cannot be denied. The logic for such collections is the product of a fever dream of apocalyptic economic collapse and the not unreasonable desire to have “something” to barter.
To the collector who derives joy from the thrill of the chase, who acquires and holds forever (or trades for a better find), or who finds fulfillment in the relationships forged through a shared interest, then I say more power to you and to carry on. For investors looking for a hedge, the following paragraphs seek to frame the actual value in that.
Why Start a Collection?
Some collections start naturally—through a shared interest with a parent, grandparent, or friend—or maybe through an inheritance or gift. Exposure to a new, curious endeavor can also ignite a fire. I can still recall captivating 3am conversations with a senior resident whose decades-old coin collection was still growing. While I am no numismatist, I quite enjoyed learning about the intricacies of coins—and I enjoyed it even more seeing his face light up when explaining it. It may not have inspired me to throw my earned pennies at more valuable pennies, but it underscored the difference between collecting for pleasure and collecting for value.
If you are the type that is collecting for pleasure—or even collects for pleasure AND for value—then this hobby may best be best thought of as a luxury. You probably aren’t looking to buy a Porsche and sell it at a profit. This is distinct from owning something that will grow in worth uncorrelated with the market with the option to sell at the optimal time. In this latter instance, the investor is better served to treat the commodity like an individual stock. At the risk of looking dumb, I would posit that amassing a collection may be reasonable if it is composed of a generally appealing asset, is appropriately scaled to the portfolio, is rationally disposed of, and is yielding personal satisfaction. Allow me to elaborate.
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Assessing High-Demand Collectibles
Unlike the equities and bond markets, the micro-markets that encapsulate rare books, coins, toys, and the like are somewhat unproductive. That is, they don’t monetize. With the possible exception of YouTube celebrities, no one pays you because of your awesome accumulation of whatever. These goods don’t contribute to building infrastructure, business, or trade. As the art market highlights, there is value to be found, but this is completely dependent on what some other person is willing to pay at a given time. This results in an offload dilemma, discussed in further detail below. The profit or loss of the future transaction is foremost affected by the number of potential buyers, the desirability of the item collected, and the utility to the consumer.
It would behoove you to put your resources into an asset with the widest array of buyers possible—in other words, those collectibles with the highest consistent demand. In a world where even deer antlers have a market, resilience in downturns is built in part from a large pool of possible buyers. The value of a collection of fine watches or Ferraris is going to be limited by the number of people who can actually purchase them and potentially limited by the taste of the owner. Anyone who has ever had to conduct an estate sale can attest that one person’s preference may not reflect that of other collectors.
Assets must also be utilitarian. If we are discussing collectibles through the lens of a doomsday hedge, one has to think about the use of that which is collected. Take, for instance, gold: if you have a collection of bars or coins, how many (and of what gold content?) would you “need” to use for barter? How long will that last? Here is where collectibles as a hedge become more difficult to define: in essence, they are acting as a hybrid commodity and alternative currency. The environment in which they are traded is fickle and tenuous, even outside of a collapse of civilization. Utility is key in assessing the strength of such assets.
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Where Collectibles Could Fit in an Asset Allocation
A good rule of thumb is to keep all “alternative” investments under less than 5% of your portfolio. This includes things like cryptocurrency but excludes the harder traditional investments such as real estate. Why 5%? Because I think that you should be 95% confident that the market is going to perform satisfactorily in the long term. It's a bit of a different story if you inherit the world’s most expensive stamp. But any more than 5% and the risks of ownership, coupled with the opportunity cost, outweigh the benefit. Admittedly, many successful people have done well in pursuits outside of the stock market, but you won’t find support here for going heavy in Andy Warhol Cookie Jars.
I suspect that for most White Coat Investor readers, there is a shared understanding that the surest way to financial success is the amicable coupling of a successful career in a high-earning profession and the diligent contribution of savings to tax-efficient retirement accounts.
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The Offload Dilemma
Tax implications, investor appeal, transaction costs, and timing should be strongly considered when building or acquiring a collection.
Frankly, selling collectibles is not a tax-favorable proposition. For assets such as precious metals, any realized profits are subject to capital gains taxes, though tax-loss harvesting is possible (yes, they can and do lose value). Not so for art, but rest assured the IRS will find a way to wrap its meaty paws on your investment—and likely in a way that is opaque and illogical.
An argument to be made is the potential donation of a collection or asset to defray a tax bill. I find that argument to be somewhat anemic, certainly for those of us taking the standard deduction and even for most who don’t. Yes, this is a possible benefit (unless you are the creator of the asset), but if you are collecting art or whatever else for the tax advantages, you are either very wealthy or you misunderstand the tax code.
Collector appeal is vital to offloading. A mint condition Michael Jordan rookie card will likely enjoy broad attractiveness with a healthy swath of potential buyers. The same is true for a Shelby Cobra. But add in auction fees and the aforementioned taxes in a potential sale, and the luster fades. New forums exist for partial ownership of rare works and other novelties which may make selling more streamlined, but costs are problematic.
Finally, as with any investment, timing matters. God forbid you need to liquidate a collection at the same time everyone else does, or when your family’s documentless heirlooms are outlawed. If it seems like there may be an easier way to build wealth, it's because there is.
Do I Enjoy This Investment?
Be it a dearth of buyers, plummeting value, or unforeseen changes in the global economy (COVID, anyone?), you may be stuck with your investment indefinitely. Timeshares come to mind, for some reason. Are you OK with this investment going to zero?
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Looking for an alternative investment that won’t end up the victim of another bauble bubble? Look no further:
You work hard for your money, but money cannot buy you time. It can certainly enrich the rare time that you do have, however. And time is one of the currencies of relationships. Investing regularly in family and friendships through date nights, vacations, and shared experiences may be the best use of excess savings. Well beyond avoiding the most catastrophic threat to your wealth—divorce—married physicians need to stoke the embers of their marriage as a means of wellness and contentment. I think Rick Ferri had it right when he said:
“I don't have any gold in my portfolio. Thirty-seven years ago, the best investment I ever made was gold. I bought two gold wedding rings, and it has yielded me a wonderful 37-year relationship, three children. So far eight grandchildren. I can't do any better than that in gold.”
Avoiding preventable illness by maintaining a physically active lifestyle is an integral part of full-spectrum wealth. To this end, finding enjoyable and habitual exercise is paramount. Money helps: perhaps it's a brand-new Peloton or a Woodway treadmill. Maybe you fancy joining a rowing club or taking routine trips to your favorite spa. I don’t need to tell you how important your health and wellness are; you see it every day. But do you invest in it as much as you should?
#3 A New Skill
We are curious creatures, and having income to scratch that itch is a wonderful thing. Culinary school, a pilot’s license, or even a luxurious new degree are all made possible through judicious use of extra savings.
These alternatives, as you have probably noticed, all require time. Money cannot buy time, it's true, but financial independence can save it. Money cannot buy happiness, either. But the freedom that comes with it is indispensable. For prudence’s sake, I would argue that the best collections are the memories made with loved ones. After your savings goals are met, enjoy the journey to financial independence by enriching the good and habitual experiences that keep you well. You don't necessarily need a rare gem collection for that.
Do you invest in collectibles, or have you ever thought about doing so? Have you made money off it? Do you think it's actually possible to have a sustained income from it? Comment below!