Investing in Collectibles - Is It a Smart Investment?

Collectibles and memorabilia are an alternative way to invest, and for many people, a more enjoyable way to do so compared to buying stocks or bonds. There are many issues to this style of investing, but if you are able to gain specific industry knowledge and have a passion for the field, this route may be able to provide greater gains and fulfillment at the same time. In this article we will look at the positives and negatives of being a collector and make a determination on whether the average investor should expose himself or herself to this type of risk.

Positives

The biggest positive of collectible investing, and the one that draws most people to it, is that you can trade something you are passionate about. This can include art, sports memorabilia, and other historic items. The issue many investors face is that they confuse the hobby aspect for the financial aspect and end up only purchasing collectibles they prefer, which the market may not have demand for. If you are able to take advantage of your industry knowledge and purchase items that can sustain a trend or carry long-term value, then you will be able to profit from your knowledge rather than suffer from it. 

Another positive for this industry is that the values of the assets usually track with the rate of inflation and allows the investor to have protection from larger macro-economic factors.  The other upsides include being able to collect any cultural item, the ability to trade assets across geographic areas without regulation (for the most part), having temporary ownership of rare items and being able to hire dealers to sell products for you at a markup.

Negatives

There are quite a few reasons to not become an investor in this space. The first reason is the liquidity issues. If you purchase an item, there is no guarantee that the item will be sold in a certain timeframe. This can cause issues if you require withdrawing capital in between trades, and increases the overall risk of holding any asset that can depreciate. The assets also do not provide an income stream for investors who want to see an incremental return over time, which further deters many investors.

Another downfall for investing in collectibles is the requirement of having a knowledge base of the trends in a certain industry. There are industry specific issues that can alter the value of assets extremely quickly, and this volatilely makes it hard to project the long-term value of any asset that does not carry a historic significance. 

Usually based on the asset’s historical value, an item’s intrinsic value usually never comes from its utility. This makes it almost impossible to create a margin of safety and to understand the exact moment to buy and sell based on fundamentals. This type of investing is purely based on market trading, which means the item is only worth what another person is willing to pay for it.

Based on all the reasons stated in this article, it is clear that investing in this space requires passion and industry knowledge. If an average investor is seeking this type of risk profile, they should consider seeking an expert third-party to invest behind, rather than to begin to trade on their own.