Investing in Collectibles: What are the Pros and Cons?

Spotlight: Investing in Collectibles

Collectibles are a form of alternative investment. These can include items such as vintage wines and whiskeys, memorabilia such as rare postage stamps, art, cars and antique jewellery from bygone eras. Some collectibles can be desirable assets because of their rarity, uniqueness, historical significance, or aesthetic appeal and so are expected to increase in value over time. However, investing in them is high risk and investors should be aware of the potential pit falls. Factors like market demand, condition, rarity, and provenance play a significant role in determining a collectible's worth. For this reason, successful investing in collectibles often requires specialist knowledge and expertise.

We talk through some of the benefits and drawbacks of investing in collectibles below:

What are the pros?

Diversification benefits – collectibles don’t usually move up and down in value the same way that stocks and bonds do. Some investment strategies may use them to add diversification to more mainstream assets.

Potential for high returns – certain collectibles have increased significantly in value over time, for example, rare paintings or vintage cars can fetch high prices at auctions.

Tax benefits – depending on the country and type of collectible, there may be tax benefits. As with any tax related issues, this will depend on individual circumstances and advice from a tax professional should always be sought.

Tangible Assets – unlike stocks and bonds, collectibles are physical items you can see, touch, and enjoy, which to some investors provides a sense of satisfaction that ‘paper assets’ might not offer.

Personal enjoyment – investing in collectibles can be personally fulfilling. If you have a passion for art, history, or specific hobbies, investing in these areas can be both enjoyable and profitable. After all, you can’t put a price on nostalgia!

What are the cons?

Illiquidity and volatility – unlike stocks and bonds, most collectibles don’t trade frequently. This can also lead to a skew of buyers in good economic environments and forced sellers in poor economic environments. So although these assets have historically not behaved in the same way as stocks or bonds, they act like risky assets at market extremes and there can be significant transaction costs.

Subjectivity - unlike traditional investments, the value of collectibles can be highly subjective and vary significantly.

Risk of fraud and counterfeiting – the collectibles market is rife with fraudulent activity, making it challenging to verify the authenticity and value of items, especially those that are highly sought after, as they attract more counterfeit attempts.

Reliance on factors out of your control – the value of collectibles is heavily influenced by market trends and popularity. If a particular artist or style falls out of fashion, the value of these collectibles may decrease significantly.

High costs – collectibles often demand a significant initial investment. Finding and purchasing high-quality collectibles can be challenging, and the entry cost can be prohibitively high for many investors. Direct ownership involves costs such as storage, insurance, and maintenance. Exposure to collectibles can be obtained through investing in specialist funds, rather than holding the physical assets directly. These funds may charge high management fees to be compensated for this and do not carry the investor protections afforded to mainstream, regulated funds.

Collecting can be a rewarding hobby, but investment in collectibles is not suitable for everyone and should only be considered by investors with adequate income and assets in mainstream investments to meet their needs with excess to invest and who can afford to lose the money.

The Noise

The UK economy grew more quickly than initially thought in the first quarter of 2024, expanding by 0.7% from the previous quarter, above the initial estimate of 0.6% growth. With the figures coming just a week before Britons vote, the data from the Office for National Statistics confirms that the UK exited a shallow recession at the start of 2024. The overall growth picture still looks weak for the UK, with first quarter GDP just 0.3% higher than a year earlier. Looking ahead to the second quarter, the Bank of England expects the UK economy to grow 0.5%, faster than previously projected. They are also expecting steady growth for the rest of the year as consumers take advantage of rising wages and benefit from slowing cost-of-living growth.
The Bank of Japan is indicating that its quantitative tightening (QT) plan in July may exceed market expectations and could potentially include an interest rate hike. This move marks a significant step in its gradual withdrawal from extensive monetary stimulus efforts. Hawkish hints delivered over the past week highlight the pressure the central bank faces in the wake of a continued fall in value of the Yen, which could push inflation to stay above its 2% target by raising import costs. The Bank of Japan’s balance sheet of bonds remains considerably above that of the Federal Reserve and European Central Bank when compared in ratio to nominal GDP. Bank of Japan Governor Ueda has said it could make a sizeable cut to its bond buying, to reduce the size of its $5 trillion balance sheet.
Denmark is poised to become the first country in the world to impose a CO2 tax on agricultural emissions, targeting livestock. This trailblazing policy, which aims to significantly reduce greenhouse gas emissions, will take effect in 2030, with the tax incrementally increasing by 2035. Revenues made from the tax will be used to support the farming sector’s green transition. Denmark is hoping that their new policy will inspire other nations to implement similar measures in pursuit of their own climate goals. Despite initial concerns, Danish farmers view the policy as viable for maintaining their businesses, with the Danish minister of Economic Affairs estimating that the tax will only add an extra cost of 2 crowns (£0.23) per kilo of minced beef by 2030.

The Nuance

Looking back on this week’s key US economic indicators, the mixed bag paints a complex picture of the US economy. While the job market shows improvement, the housing sector struggles, and consumer confidence wavers.

In recent economic developments, US new home sales have hit a six-month low, adding to concerns about the state of the housing market. Sales dropped by 11.3% in May, reaching a seasonally adjusted annual rate of 619,000 units, largely attributed to rising mortgage rates weighing on demand. This decline marks the lowest level since November of the 2022. Supply of housing in the US now sits at its highest level in 16 years, a stark contrast to the UK which has been battling with years of under-supply.

Meanwhile, U.S. weekly jobless claims have shown a positive trend, edging lower recently. The number of Americans filing for unemployment benefits fell to 233,000 in the latest report, from 239,000 the week prior. Claims tend to be volatile around public holidays however, with the US having celebrated Juneteenth last week. Claims have risen to the upper end of their 194,000 – 243,000 range of this year. Economists are split on whether the current positioning within this range points to rising layoffs or a repeat of volatility in the data experienced this time last year.

Consumer confidence, however, has slightly dipped in June, reflecting growing concerns about the economic outlook. The Conference Board’s consumer confidence index fell to 100.4 from 101.3 in May. This decline is primarily driven by a less optimistic view of future economic conditions, despite a slightly improved perception of the current labour market.

All in all, this week’s data points to a gradual slowing of the US economy, while remaining on track for a "soft landing".

Disclaimer

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.