Should You Invest In Collectibles?

Photo by Yazid N on Unsplash

If you’re reading this article, you probably have some type of collection. You might collect comic books, action figures, trading cards, records, art, or something far more obscure. As a collector, you recognize both the objective and subjective value of these objects, and you sincerely enjoy scouting for new acquisitions and managing your existing collection.

But is it possible to treat these collectibles as a genuine financial investment? And if so, how do you approach this strategy?

Conventional and Unconventional Investments

Conventional investments are conventional for a reason. They’re typically somewhat accessible, relatively easy to understand, and capable of producing reliable returns. For example, one of the most popular types of investments is shares of stock, allowing people to invest in fractional slivers of equity from publicly traded companies. Over time, stock prices increase and companies pay dividends, typically leading to returns, especially if you have a diverse portfolio.

Rental property management is another popular choice. With a reasonably attractive rental property in a reasonably attractive neighborhood, you can usually collect more in rental income than you pay in expenses, resulting in a monthly profit, along with long-term property appreciation.

But when it comes to alternative investments like collectibles, the equation doesn’t work the same way. You won’t be able to count on, say, a 5 percent annual return on your investment, or a fixed amount of passive income each month. Instead, you’ll typically accumulate collectibles and sell them at opportune moments, when the prices come to a peak. Rising prices are far from a guarantee, however, and investing in collectibles is more challenging than it might first appear.

The Potential Merits of Investing in Collectibles

There are some good reasons to consider investing in collectibles.

•       Diversification. Investing in collectibles is an easy way to diversify your portfolio. If you already have a portfolio full of conventional types of assets, you might be interested in something that deviates from the norm. This can sometimes be an effective way to distribute risk and potential rewards, ultimately stabilizing your overall rate of return.
•       Specialized knowledge. You may also have specialized knowledge that can make you a savvy investor when it comes to certain collectibles. If you’re familiar with this niche, you might be in a unique position to forecast trends, make smart purchases, and sell at the absolute highest point. That said, you should be cautious not to overestimate your potential success.
•       Potential growth. Over the decades, we’ve seen innumerable types of collectibles explode in popularity, sometimes decades after they were originally in circulation. Although many collectibles never appreciate and value or even decline in value, there is a potentially significant payoff if you manage to time things right.
•       Mitigation of risk. Collectibles may also be able to help you mitigate risk. There are certainly some strong risks involved with investing in collectibles, but pricing trends in the collectibles world are typically insulated from broader market trends.
•       Personal attachment. On top of that, you may have personal attachments and personal interest in the collectibles that you procure. You may genuinely enjoy the process of searching through pricing trends and looking for unique items, and you’ll be able to put your favorite items on display as you build your investment portfolio.

Limitations of Investing in Collectibles

However, there are also some strong limitations associated with investing in collectibles.

•       Unreliability. As you might imagine, collectibles are not a reliable investment, especially when compared to conventional options like stocks or bonds. Even if it feels like an asset is a sure bet, there’s no guarantee that it’s going to increase in value over time.
•       Unpredictability. It’s extremely hard to predict what people are going to value in the collectibles world. Today’s hottest commodity might be completely forgotten tomorrow. Conversely, it’s sometimes the most obscure, least popular things that unexpectedly surge in popularity in the future.
•       Objective vs. subjective value. Just because something is valuable to you doesn’t mean it’s valuable to someone else. With collectibles, you need to factor in both objective and subjective value, which is hard for investors to do consistently – especially with such variance in subjective values.
•       Lack of liquidity. Liquidity is a measure of how quickly and easily an asset can be turned into liquid cash. Unlike stocks and other liquid investments, collectibles can be extremely hard to sell or otherwise liquidate. If you’re investing with a long time horizon, this may not be as big of an issue for you, but it’s a significant factor to consider, regardless.
•       Condition requirements. Many collectibles only hold their value if they’re kept in pristine condition, which can present challenges of its own.

It’s certainly possible to invest in collectibles as part of your long-term financial planning strategy. However, it’s important to remember that collectibles are still a somewhat unreliable, alternative investment – and if you want them to be a valuable part of your portfolio, you’ll need to plan how you integrate them carefully.