Try Not to Let Your Client Pursue This Investment

The evolution of Amazon, eBay and other digital "buying" sites gives the collectibles market the appearance of being diluted, and less profitable.

Is it true?

It’s a question that matters to collectibles consumers who count on their “picks” to add financial value to their retirement funds. But investment advisors better have an answer for them.

First, there is a school of thought that collectibles can be an invaluable – and even profitable – component to a long-term investment portfolio. Plus, it can be fun for the collector, too.

Take the creative arts market, where rates of return are competitive with bonds.

From 1900 to 2012, art, stamps, and musical instruments appreciated at an average annual rate of 6.4 to 6.9 percent in nominal terms, or 2.4 to 2.8 percent in real terms, said Europeans researchers Elroy Dimson and Christophe Spaenjers, in their study “Risk and Uncertainty in the Art World.”

Despite similar long-term returns, short-term trends can vary substantially across these different types of emotional assets, the pair said.

“Collectibles have enjoyed higher average returns than government bonds, bills, and gold,” the study found. “However, it is important to recognize the quantitative importance of transaction costs in collectibles markets. In addition, price volatility is larger than is suggested by conventional measures of risk, and these assets are also exposed to fluctuating tastes and potential frauds.”

Yet, despite the large costs and many pitfalls, investment in emotional assets can pay off, because of the non-financial yield they provide.

Rare is Less Rare

But ask a money manager, or even a collector specialist, and they’re usually skeptical.

“The internet has made the world smaller and the rare less rare,” said Randeen Cummings, founder of Cummings & Associates, an appraisal and estate sales firm located in Eugene, Ore. “Not helping is the misrepresentations of authenticity on eBay and other auctions sites, which create risk for the novice collector.”

There are a few “good bets” on the collectibles market, she conceded.

“Sterling silver, especially hollow ware and flatware with known maker great design and historical presence” are the very desirable, she said. “Silver, according to many experts, is held artificially low and will soar at some point.”

Fine period toys, period cabinetmaker American and English furniture, and early sports items (think Babe Ruth’s baseball uniform) also can significantly in value, Cummings said.

But the list of collectibles that usually depreciate, and not appreciate, is a long one, she added.

“Avoid replicas, mass-produced collectibles, reproductions, as they will not
retain their value or appreciate,” Cummings said. “Mass-produced items such as Franklin Mint coins and collectibles, collector plates, mass-produced coins, stamps, fine china sets and crystal, baseball cards and much of the sport memorabilia after 70s and after are bad bets.”

Demographics also play a role in the dilution of the collectibles-for-profit market.

“The collectibles market is not dead, but it has radically changed in the past 15 years,” said Mike Rivkin, owner of California-based Antique Galleries of Palm Springs. “Young professionals are not accumulators, not collectors, and have no interest in mom and dad's collection of Lladro figurines. … Those limited-edition markets are dead and will remain so.

“We have lifelong collectors approach us every week with painstakingly assembled collections, and we tell almost all of them that a thrift store is their best option,” he added.

'A Bad Idea'

Financial industry professionals are more candid about collectibles, and why they don’t and won’t work as client investment vehicles.

“They’re a bad idea,” said Mike Arman, a retired mortgage broker and financial consultant based in Oak Hill, Fla. “The vast majority of mass-market collectibles are simply ways to separate you from your money.”

Most collectibles are worth very, very little brand new, and as soon as the fad passes, are usually worth next to nothing, Arman said.

“Every once in a while, someone pays silly money for one of these items, at which time the collector-verse goes nuts because they have just been validated, but somehow, there is a huge absence of subsequent buyers for anything further,” he noted.

Investments require some degree of liquidity, some degree of appreciation, and some kind of a ready market when you want to cash out – all portfolio management components that largely don’t exist with collectibles.

“Collectibles are illiquid if the market (assuming there even is one) is down,” Arman said. “Also, no lender with even half a brain will lend anything on most collectibles, and if they do, you're looking at pawn shop numbers – 10 percent of full market value, at best.”

There are other alternative investments that actually can add value to a long-term portfolio, Arman said.

“Believe it or not, firearms are an excellent investment. If you buy them right and hold onto them, in less than a decade they can often return five or six times their purchase price,” he said.

Private residential first mortgages are a good “alt” investment, as well.

“They’re low risk, you can recoup your investment fairly quickly if you have to foreclose, you have income while the loan runs, and you can sell the loan if you want to – all with an ongoing income of 10 to12 percent of the investment amount,” Arman said.

But collectibles don’t belong in that conversation.

“If you want to accumulate stuff, buy what you enjoy and what makes you happy,” Arman said. “If you can sell it in the future for more than you paid for it, great, if not, hopefully you enjoyed it.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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