Are Collectibles a good investment?

I am often asked this question, or put in a position of having to answer this question by people that tell me their collections are part of their investment strategy or estate plan. For everyone that has ever asked me the question or suggested to me that their “collections” were part of their investment strategy the answer was an unequivocal no. Kind of like any luxury, if you have to ask the question you can’t afford it. If you have to ask if your collection should be considered part of you financial plan, you probably don’t understand enough about investing in collectibles to make it a good investment for you.

Yes there are rare exceptions of collections that may be considered and investment. The operative word is rare! We will get into what collectibles could be considered an investment shortly, along with some of the pros and cons of that type investment. But investment grade collectibles are not what most people have in their collections at home. So I want to start by addressing what most middle class people are referring to when they think their collection is an investment.

In a free market society supply and demand determines the value of items. Most people that collect items are collecting mass produced items, where supply is high. For periods of time demand may also be high thus causing the items value to go up incrementally initially. But as often happens with mass produced collectibles, as demand rises so does production. When demand starts to fall off, it often falls off fast. This can happen for many reasons, the fad ends, or people realize the items are not as rear as they thought when they begin to see them in every store or every friend’s house. In any event, as the original collectors loose interest or die off, demand shrinks, causing prices to fall. As prices plummet those that were in it purely as an investment try to dump their collections. Unfortunately at that point there are so many of the items already produced that the market is flooded, and prices continue to spiral down.

Two of the most famous examples in America, are Bennie babies and Hummel’s.

Beanie Babies were extremely popular in the late 1990’s as a fad collection with some traders flipping some of their collection for as much as ten times their purchase price. It was in the early days of the internet and considered by some to be the first internet sensation. They made up 10% of eBay’s sales at the time. The news of their value fueled the speculative frenzy, increasing demand and therefore price. While that tenfold return may sound like a good investment, and indeed was for those that got into and out of the market at the right time, it was very speculative and risky. Far more people ended up with hundreds of beanie babies that soon were worth pennies on the dollars. With a few exceptions anyone that still has any of these left in their house will be lucky to sell them for anything. Just check out the prices at the next garage Sale you go to.

Hummel’s actually had a much longer run starting after World War one and lasting into the 1980’s. As they gained in popularity more and more were produced and “collector clubs” were sending new ones out every month. They were being over produced. With the advent of the internet it was so easy to buy these on the secondary market that they plummeted in value. There are still a few very rare originals that may fetch a decent price, but for the most part these also now sell for pennies on the dollar.

While those are two of the most well-known bust in the collectibles markets, people collect all types of things, from coins and stamps to memorabilia and stuffed animals. Collecting things was much more popular for the older generation’s than it is today. Many people born pre 1960s were some of the largest collectors, followed by people born in the 60 and 70s, but there are very few people that collect things in the more recent generations, and even some of the older generations are losing their interest in collections.  So as all the collectors die off or lose interest and few new collectors enter the market liquidating collections becomes more and more difficult with each passing year.

So if your collection brings you joy and you recognize it as a want and not a need (see my post on knowing the difference between needs and wants) by all means have fun with it as long as all your needs, including savings, have been taken care of. If you do collect things do it for the joy they bring you and be realistic and honest with yourself about its value and the impact it has on your financial will being. Also understand that if your heirs do not share your passion for your collection you will be leaving them more of a burden than a gift as they struggle with disposing of something that was so important to their parents, but has little value or meaning to them.

If after reading this you still want collectible as part of your portfolio there are some things you can invest in. You should not do this unless your portfolio is large enough that you can diversify 5% of it into very risky and speculative investments. If you want to go this route make sure you understand the market will and all the risk associated with it. Some of the more common areas are art or rare coins. Again the operative word is rare. We are talking about one of the kind type stuff, certainly nothing massed produced.

When investing in rare items, unless you are a dealer, you are usually buying retail and selling wholesale, so any appreciation has to account for that markup and/or sales commissions. It is a very speculative market, and not very liquid. Unlike a stock you don’t have thousands of people every day willing to offer something for your stock. The rarer the item, the fewer the potential buyers, and the longer it may take to get a price you want. It does not matter what an item appraises for, when it comes time to sell you can only get what a buyer is willing to pay for it. So even though supply is low, if there is no demand for the item when you want to sell it, you won’t’ be able to sell it. On the plus side if it is something you enjoy looking at you get that pleasure while you own it. On the down side, you have to bear the risk and cost associated with it becoming damaged. This may include storage and insurance cost.

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