Examples include classic cars, antiques, paintings and fine wine.
But do these sorts of investments make financial sense? Jens Hagendorff is Professor of Finance at Edinburgh Business School and explains this notion.
“There is some very good evidence out there, that says those types of investments provide returns that are very similar to bonds but the riskiness of these assets
is very similar to equity. So you’re getting a fairly low return over a longer time period, but at a very high price in terms of riskiness. And next to the riskiness, investors in collectibles also have to bear in mind that the transaction costs can be very large”.
So, why are collectibles particularly risky if they are tangible assets?
Jens elaborates, “there is less of an active market in these types of assets. When you’re looking at stocks, you’re looking at thousands of buys and sells per minute in some of these stocks. If the price of these stocks were to be out of line with what is justified, other investors would jump in, bring the price up or down to a level that is
justified. If you’re looking at auctioning off a painting, you may have a few buyers in the room and a few on the telephone, you are looking at a very different type
of market. So these markets are less efficient, are less reflective of true underlying information than stocks are”.
A common mistake that investors make is viewing collectibles as good diversifiers. They’re not.
Nonetheless, if the point of that purchase is to invest in an asset that you expect to give you a good return for an acceptable level of risk, it’s not a good investment. It’s very
risky and returns, on average, are fairly modest.
So, the bottom line is, does it really matter to you if the monetary value of your investment falls substantially? If it does, then collectibles probably aren’t for you.