Antiques and collectibles have reached new heights of popularity in recent years.
Dozens of reality shows are on television featuring pawnshops, pickers, antiques, and collectibles.
Inevitably, these shows focus on people finding obscure and highly valuable items that they will be able to resell at a steep profit. Of course, there are those folks who bought items for far more than they are worth, and those who are forced to sell far below a fair price.
Investing in antiques and collectibles is not easy, especially if you want the items you purchase to retain value or appreciate over time.
First and foremost, you should consider the personal satisfaction and enjoyment you gain by amassing any collectible. With the width and breadth of collectibles that can appreciate in value over time, there is bound to be something that you want to collect and display.
If you are selective and do plenty of research, you will be able to find items that you enjoy collecting and can sell at a later date for a gain.
In a way, you should consider it something of a non-monetary hedge: Even if the market collapses for what you collect or if the value of it drops, at least you're getting something out of it.
The key is knowing the upsides and downsides of the antique and collectibles market, along with what makes an item valuable in dollars and cents, not just in sentiment.
As investments, there are a number of unique upsides you cannot replicate with anything else:
- Tangible assets: Collectibles are not influenced by inflation or interest rate headwinds.
- Low-correlation to the stock market: Collectible markets rarely move in tandem with the economy.
- Growing rarity: It is all supply and demand. Over time, historic collectibles become scarce, as they are lost, damaged, or enter museums and institutions.
- Tax differences: Many items that are collectible are considered as "wasting assets" and do not factor into inheritance or capital gains tax calculations.
- Personal control: You hold on to the assets; you don't have to worry about a Bernie Madoff figure bilking you out of your money or anything like an investment bank run.
Another potential upside is the ability to capitalize on arbitrage situations. This approach has been glorified by TV shows such as American Pickers and Pawn Stars.
There are all sorts of reasons why people are willing to sell items for less than they are potentially worth. Sometimes, they simply don't know an item's true value. Other times, they just desperately need the cash.
Estate and yard sales, along with flea markets, often hide massive profit potential. You really have to know exactly what you are buying and what it is worth. Dealers and sellers prey on overconfidence in buyers.
The main problem in investing in collectibles stems from the knowledge (or lack thereof) of what is rare and what a fair price is for the item.
The level of research and experience is a huge barrier to entry for anyone who wants to get in and turn a buck.
Just consider sports memorabilia... Many know what sports memorabilia will be coveted based on the player or team, but it took years of watching games and following leagues for them to acquire this knowledge.
Even if you know quite a bit, unless you are an expert, there is always the chance that someone else has more knowledge — and is playing you for a fool.
Here are some other drawbacks:
- Markup: If you go through a dealer, you will pay a hefty markup for the retail price. If you sell to a dealer, you will essentially be selling at a wholesale price.
- Maintenance: Some collectibles just need a simple protective case. Others, like wine and art, may need special rooms or sensors to monitor moisture, heat, and light. Anything exceptionally valuable should be insured, adding a constant cost while you hold it.
- Wear and tear: Accidents happen. Unfortunately, they can catastrophically affect value. Anything that isn't in pristine condition will often sell for half of the potential value, if not less.
- Counterfeits and fraud: High-quality forgeries can fool even experts. Shady dealers will sell something worthless for a small fortune.
- Low returns: As a whole, most collectibles appreciate at a slower rate than stocks, bonds, and other investments.
- Illiquidity: A collectible is only worth what someone else is willing to pay for it. Sometimes, that means a previously hot collectible market will dry up and prices will plummet.
- No tax-free option: You're going pay sales tax on your collectibles. Period. The fact is you cannot shield money used to invest in collectibles from income taxes the way you can when investing through an IRA, 401(k), or other retirement accounts.
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There are far too many kinds of collectibles to list here. And they all differ based on how they are handled and the interest in them.
The best way to think about collectibles is by their overall type and then a subcategory...
Here are a handful of the most popular types and specific concerns you should have regarding them.
Sports Memorabilia: Estimated $10 billion global market with several billion in the United States.
- Regional demand: Depending on the team or player, different items can command wildly different prices. Anything associated with a home team or local sports hero is likely to be in greater demand.
- Type of sport: European soccer jerseys sell well... but only in Europe. Hockey collectibles won't do well to the South, where there aren't any teams... etc.
- Condition and maintenance: Vintage baseball cards, signed balls and bats, and jerseys can degrade if they are exposed to too much light, moisture, or wear. Unless it is really prized, anything less than pristine will be worth far less.
- Fakes and money-grabs: There are plenty of forged signatures, fake cards, and "collectible" items that are mass-produced to capitalize on demand. If it is new and made to be collectible, the only people making money are the manufacturers.
Music Memorabilia: Estimated at $10 to $20 billion per year worldwide.
- Recordings: First print vinyl records well be worth far more, and vinyl is worth far more than any other type of media. Collectors will want the album cover to be unopened or in otherwise pristine condition, including the cover and any materials that were included with the album. First albums are always produced in a small batch, and then later a second print is issued if there is demand. Later albums are mass-produced. A first print of an early Beatles album is worth far more than anything made in their later years.
- Equipment: Some high-end collectors and musicians want instruments or equipment used by a musician. Authenticity is exceedingly hard to prove. A guitar used by a famous musician is hard to authenticate. Make sure a third-party confirms it. Reproductions and imitations of famous instruments far outnumber anything legitimate.
- Shifting Tastes: Vintage rock and roll, Motown, and country memorabilia is in high demand because baby boomers that grew up listening to music from the 50s through the 70s have money to burn. In several decades, all but the most iconic of items will be virtually ignored.
Pop Culture and Consumer Memorabilia: This includes everything from movie memorabilia to toys and lunch boxes to advertisements...
There are only a couple consistent rules:
- Buy vintage. A new Coca-Cola sign is worthless. An old sign or poster in great shape is worth far more. The same goes for any consumer items. Anything from the last couple decades was mass-produced on a much larger scale, and there will be no scarcity.
- Make sure it is complete. Anything missing parts is only worth a fraction of a pristine item. A lunch box without a thermos or anything similar will not be in demand.
- Originals only: Just like albums, it has to be an original to have any value. Replicas and massive secondary production are rampant. For example, a hundred-year-old copy of Moby Dick may be old, but the first edition was published in 1851, so it's all relative.
- Iconic Brands: People are far more interested in Coca-Cola or Disney than the obscure competitors they put out of business... At the same time, they produced far more items because of past demand and the companies' sizes.
- Fickle Demand: Hummel figurines were once treasured and coveted; but these days, they fetch far smaller prices... Beanie Babies imploded within a couple years...
- The Collectible Trap: A "limited edition" cup plastered with the characters from recent movies was only limited to how many they could sell to fools before there was no more interest. With product placement deals and mass media frenzies, nothing marketed to collectors is for anyone serious about collecting memorabilia.
Wine: $164 billion total, $4 billion in extremely high-end fine wines, $300-400 million of auctions
- Extreme learning curve: Yearly crop differences, labels, regions, and maturity times make knowing what will be in demand extremely hard to learn or predict.
- Global demand: Rapidly expanding middle and upper classes in China are fueling demand for European wines. On the high end of the scale, rich Chinese are snapping up prestigious vintage wines. Prices are high, but dependent on emerging market growth and fortunes.
- Storage: Seemingly minor changes in light, temperature, or heat can destroy a wine. Any signs of poor storage will dramatically affect taste and send potential buyers running.
- Fakes: Recently, a famous chef at a Michelin starred restaurant in Chicago sold a $45,000 bottle of wine that was counterfeit. Depend on third-party verification for high-end wines.
- Costs: Storage and insurance is not cheap... nor is the 15%-25% cut an auction house will take.
- Funds: There are wine funds that provide opportunities without a need for personal expertise in choosing wines or knowing how to maximize sale value.
Art: Estimated $60 billion global market
- Style: Certain styles of art move in and out of fashion quite regularly. Post-War Contemporary art is hot, while Impressionist works appreciated far slower in recent years. Tastes can change overnight.
- Impossible to predict fame: A good artist may never produce anything with value beyond aesthetics. No one can predict which contemporary artists will be "the next big thing."
- Fakes and reprints: Countless near-identical copies of the works of famous artists have been produced. Some fool the best of experts.
- Extreme volatility: You're dependent on auctions to sell and prices depend on demand. The new rich of China and India are catapulting prices, and the market may be overly hot for years to come...
- Costs: Insurance and maintenance to control light, heat, and moisture add up fast. Drop artwork, and you'll be lucky if it doesn't become worthless.
- No transparency: Art markets are murky and byzantine. There are no protections to a buyer or seller.
- Funds: For private equity investors, there are plenty of art funds that provide opportunities without a need for personal expertise for individual investors.
There are plenty of other categories that could be listed. For example, antique furniture, vases, and firearms can all be collected and appreciate in value over time as they become scarcer.
If you invest in collectibles that you are passionate about — and dispassionately evaluate the price and market — you can maintain an alternative store of wealth that you will enjoy far more than owning shares, bonds, or precious metals.