Alternative Investment: Collectibles (7 of 8)
Collectibles include classic cars, fine wines, art, stamps, furniture, antiques, watches and jewellery. They are rarely approved for SIPPs but store wealth due to their status as highly desirable items.
'Collectibles' are Risk Level 7 of 8 in Alternative Investments.
Collectibles are often added to investment portfolios to exploit diversification and therefore potentially limit risk.
The best way to invest in collectibles is to have a strong personal interest. This helps people develop the experience and expertise necessary for successful investing and provides a great insurance policy in the event that the investment is not successful – the investor can derive a personal benefit from owning these kinds of items, regardless of returns generated.
The items are physical, tangible stores of wealth that may well provide uncorrelated returns and protection from ‘financial repression’ – high inflation, currency devaluation and taxes that erode the value of other savings. Collectibles are not likely to be directly affected by stock market crashes or changes in economic policy.
A Play On Luxury?
Many collectible alternative investments derive their value from the status of being highly desirable luxury items - and this is boosted by increasing demand from emerging Asian markets where purchasing power is increasing. Some investors feel this new area of demand will continue to drive prices higher.
Although collectible alternative investments have diversification benefits and the story behind the growing demand for luxury and recent rising values is positive, these kinds of assets must still be treated with caution.
- High investment returns
- Store of wealth
- Highly desirable
- Not generally SIPP acceptable
- Extremely diverse market
Investing in these assets requires a high level of specialist knowledge. They are not fungible (a good or asset that is interchangeable with other individual goods or assets of the same type), so therefore investors must be able to accurately assess every purchase they make or place their trust in a broker or agent who has the required knowledge. Often the strong performance is based on a narrow group of assets, such as Bordeaux Premier Cru with wine or just 50 types of car that meet the stringent criteria for inclusion in the HAGI index.
Purchases outside these narrow groups may be more risky investment propositions. Investors must also consider the costs of storage, insurance, maintenance and upkeep. The value is based on what buyers are prepared to pay so, if the fashion for owning these items changes and demand falls, they could be dramatically devalued. Consider stamps, where most of the collectors are elderly – will there be another generation of collectors in 20 or 30 years’ time?
Nevertheless, there are real benefits in having a tangible store of wealth not correlated to other assets and providing protection from financial repression. Developing the required knowledge and expertise in these areas can also be a fascinating pursuit.
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