The Realities of Investing in Collectibles

    The Realities of Investing in Collectibles

    By S. Caseria

    It’s possible for anything to be an investment, if it appreciates in value over time, including cars, fine art, jewelry, baseball cards, even wine. But this alternative investment category requires special understanding of the risks and tempering expectations of a reasonable return on investment.

    There are many reasons people collect objects: general interest, a sentimental connection, or the thrill of the hunt, to name a few. If these cherished objects also appreciate in value, that’s a bonus. And the only way to determine value is by finding out how much someone else is willing to pay for it. An object’s desirability is one factor that affects value, rarity is another. That gives items that are out of production, or those produced in limited quantity, the potential to become “collectible.”

    One of the obvious benefits to investing in collectibles is that they’re tangible; you can take out your collection of rare watches and marvel at the intricacy of the movement.

    Collectibles are far less liquid than traditional securities, though, and that’s a plus and a minus. The plus is that even in the unlikely event that all stamp collectors decided to dump their collections simultaneously, there isn’t a mechanism that makes this possible like there is for electronic securities trading. The minus is that you can’t sell your collection quickly if you need money.

    Collectibles at Every Value Range

    The lower end of the collectable spectrum holds many affordable options such as baseball cards, comic books, children’s toys and figurines. The higher end includes classic cars, pieces of art, jewelry, furniture and vintage fashion.

    It’s wise to consult a professional before jumping in if you’re investing a considerable sum. Alex Finigan, sales manager at Paul Russell and Company, a restoration and sales firm for vintage cars (including Mercedes-Benz, Ferrari, Porsche, Bugatti, and Alfa Romeo models) in Essex, Massachusetts, has been guiding buyers through specialized automobile purchases for close to 40 years. In an interview he stressed that there are no guarantees, but “since the 1970s, values on collector cars have steadily increased, other than a small dip in the 1990s.”

    That upper tier is certainly something to consider due to its solid growth for more than a decade, up 469 percent.1 According to Historic Automobile Group International, an independent investment research company that created the HAGI Index benchmark to track values of rare classic cars, even the three-year performance of what they consider “top” cars over the last three years was 70 percent. For comparison, the S&P 500 grew almost 30 percent in the same 36-month period.2

    But classic cars require careful maintenance, specialized storage, as well as insurance. This is in addition to the added costs of acquisition, like auction fees or commissions, which usually come with buying vintage cars. Most experts will tell you from the outset — a love of cars should probably take precedence over investment expectations.

    If you prefer your work of art hung from a wall, keep these considerations in mind before investing in paintings, prints or photography: the market is incredibly fickle, you’ll likely need the help of a professional, and since art is generally one-of-a-kind. You won’t know the value of your piece until you sell it, since there are no individually direct comparisons.

    One expert, quoted in a recent article in British newspaper The Telegraph, said the average return on “investment-grade” art held between five and 10 years is around 4 percent.3 So art investment may be better than holding your money in cash, perhaps, but with more risk and less return than many other securities. And it comes with a lot more in acquisition costs, like sales commissions, and fees for proper transport and storage. There’s also the issue of taxation, as the IRS taxes net capital gains on some collectibles such as art and coins at a rate of 28 percent.4

    But with 64 percent of works sold at auction in 2015 priced below $5,000,5 you don’t have to buy a Rembrandt to be an art collector. Again, most experts advise, make sure you like the painting or sculpture first as there is no guarantee about when or for how much you can sell it.

    Treasure in the Attic?

    If you’re like thousands of baseball card or comic book collectors waiting for your trove to deliver huge returns, you could be in for disappointment.

    The reality for most comic book aficionados is that collections they believe are worth thousands are actually only worth a few hundred, as noted in a recent Bloomberg report.6 And a survey by financial advice site The Motley Fool found that values of unopened baseball cards from the 1980s and 1990s have actually fallen.7

    Why? Remember what determines a collectible’s value: desirability and rarity. Millions of people love comic books, baseball cards and even Beanie Babies (a hot commodity 20 years ago), so, yes, they’re desirable. But they lack rarity because they were produced in such high numbers.

    It’s possible to invest in these collectibles categories and others like them, but you must know what will increase in value, and understand that you’ll likely have to spend several thousand dollars to get a seat at the table. Baseball card experts say that to increase your chance of making money, buy cards of the big names, in superb condition, such as Mickey Mantle, Ty Cobb, Honus Wagner, Christy Mathewson and of course, Babe Ruth.8

    A Long Time Ago In A Galaxy Far, Far Away…

    What happens when two popular brands like LEGO and Star Wars come together? An epic investment opportunity, perhaps, for some people. Since 2000, the average increase in value of a Star Wars LEGO set was 12 percent. But it’s not only old sets that bring big returns. Sets released in 2014 and 2015 brought returns of 36 percent on eBay once they were out of production.9

    Is this investing or opportunistic flipping? There’s no guarantee that what’s hot in the short term will stay hot over the long term. Remember the Beanie Babies. If the Star Wars franchise loses its luster in the future, the value of related merchandise will likely fade as well.

    Based on various collectible publications and published interviews, what’s hot now includes…

    • LEGO, Star Wars collections
    • Works of art
    • Italian and German sports cars of the 1950s
    • Red wines
    • Coins

    What’s not so hot now includes…

    • Hummel figurines
    • Commemorative plates
    • Beanie Babies
    • Vintage cars from the 1930s-40s

    Collected Wisdom

    Collectibles like luxury goods and blue chip items offer the potential for good return on investment. They do, however, often require a sizable stake to get in the game, are subject to risks beyond more typical investments, and may incur a variety of fees and sales charges. This may run counter to how most people like to invest.

    What about the collectables you already have? Unless you’ve been curating the contents based on performance potential, they may not deliver the payoff you’re expecting. 

    If you’re set on investing in a collectibles category you have a passion for, get expert advice and work with reputable dealers. Know what you’re buying and where the market is heading. Don’t invest more than you can afford to lose if the investment doesn’t perform as expected. And enjoy the items for what they are first, and as investments second.

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    1 Knight Frank Luxury Investment Index, “Slaying the Competition,” Oct. 24, 2014.

    2 Historic Automobile Group International, “Top Summary Report,” April 2016.

    3 The Telegraph, “Beware the Risks Before Investing in the Booming Art Market,” April 13, 2015.

    4 IRS, “Topic 409 — Capital Gains and Losses,” March 22, 2016.

    5, “The Contemporary Art Market Report,” Oct. 6, 2015.

    6 Bloomberg, “Those Comics in Your Basement? Probably Worthless,” Oct. 30, 2013.

    7 The Motley Fool, “Have Baseball Card Values Risen in 20 Years? Actually…,” Feb. 25, 2013.

    8 Forbes, “Buy Mickey Mantle’s True Rookie Card and Other Collecting Tips from a Master,” Feb. 11, 2015

    9 The Telegraph, “LEGO ‘A Better Investment Than Gold,’” Dec. 24, 2015.

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.