Some people have become disenchanted with conventional investments. With uncertain stock returns and low interest rates many are switching to such unconventional assets such as art and collectibles.
Is art an asset or investment?
Art as an investment has been considered an interesting and profitable alternative. Art sales are thriving, with buyers eager to own something solid and beautiful and willing to part with some serious cash to get it. But it’s also extremely risky.
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There are examples of art that have sold for much more than their purchase price over time, but these are exceptions. The vast majority of art is never going to go up in price and may devalue the minute your walk out of the gallery with it.
To buy undervalued artists or well-known artists at discount prices requires a lot of knowledge or expert help.
The collectibles market
The vast collectibles market ranges from beer cans to stamps, sports and celebrity memorabilia to dolls and teddy bears, fine wines to antique furniture, and everything else you can think of.
There are loads of pop-culture treasures in many a boomer’s closet, protectively packaged and stored away. A “Lost in Space” lunch box, anyone?
What makes art and collectibles valuable?
It’s hard to predict future value of anything. You need to have a knack for figuring out what people want as well as what objects have staying power.
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Qualities that make them valuable include:
- Rarity – avoid mass produced products
- Condition – the better condition, the more it’s worth – but usually not if it has been altered in any way
- Authenticity – original paintings are worth more than subsequent prints. If you can prove a famous person owned (or signed) something it will be worth more as well.
- Age – old age can add value, especially if its also rare and in good condition.
Most importantly, however, is how much someone is willing to pay for it. Buyers are subjective, faddish and emotional. From action figures to sports cards, these are highly subjective in terms of value.
Someone may pay more than an item is worth to complete their collection, but on the other hand, the item may no longer be in favour. Individual tastes and preferences can change quickly and unpredictably.
Remember when Beanie Babies were going for $20 – $50 each (or even higher)? Now you can find them for less than a buck on e-Bay.
Proceed with caution
More people are buying with an eye on possible returns. But trying to figure out what to pay for an item is complicated. You want to make sure you don’t overpay and it can be difficult to properly value items. There’s no reliable way of doing that. Research is essential.
Auctions can get pretty wild and the thrill of acquiring objects connected to a youthful passion, for example, may cloud a collectors’ judgment. There’s the risk that the item may not trade for that price ever again.
Warren Buffett’s concept of “circle of competence” – basically, never stray beyond your level of understanding – applies here more than ever. If you are interested and knowledgeable you will make better choices of what to buy.
The problem with investing in an Old Master or first issue of the Spiderman comic book is they are already so expensive. Will they appreciate enough to justify your investment? – you never know.
Don’t forget to include other costs such as commission fees, storage and insurance.
I read of one woman who insured her collection of 7,000 Precious Moments figurines for $110,000. When she tried to consign them she found they were now worth precious nothing.
Capital gains tax is due on any gains you make from a sale over $1,000. You can deduct sale and purchase costs (e.g. commissions) but not things like maintenance costs.
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If you buy or sell a lot you might be considered a trader rather than an investor for tax purposes. In this case you’ll pay income tax on your profits rather than capital gains tax.
The bottom line
“If we’re ever in a tight spot, we can sell these at a profit. They’re an investment.”
Collectibles can make interesting investments and might be a good way to diversify and may – one day – become profitable.
In most cases, buy rare and beautiful things because you love and enjoy them, want a collection, or to have nostalgic reminisces of bygone days.
Just don’t rely on them to fund your retirement.