RP: Many people enjoy collecting valuable items — classic cars, works of art, fine wine and so on. But does collecting make sense from an investment point of view?
Elroy Dimson and Christophe Spaenjers analysed the returns provided by art, stamps and musical instruments, and compared them to returns from other asset classes. Between 1900 and 2012, collectibles — often referred to as emotional assets — produced a nominal annualised return of 6.4%, and a real return of 2.4%.
ED: There are basically three return paths that we see. For risky financial asset like equities, they’ve performed pretty well. They’ve received a financial dividend, which is what contributes to their performance. And then, if you look at the bottom end, you’ll find that there are treasury bills or cash and other assets which have produced a small income such as gold, or silver, which produced none at all.
And in between, there are these emotional assets which produce a ‘psychic’ income — the pleasure of owning an artwork or a collectible violin, or a very, very fine wine. And their annual performance is higher than that of gold or silver, for example, higher than diamonds, higher than treasury bills, but lower than the excellent long-term returns from investing in the equity market.
RP: So, the investment return from buying collectibles is reasonable. The key question to ask yourself is “How much do you really enjoy it?”
ED: It’s pretty tough to have the finest artworks as part of a portfolio because each one costs millions of dollars. But if you’re asking in broad terms, “Who should be investing in these assets?” — it’s those who get the most pleasure out of it. So, I don’t know about you, but you may find that postage stamps look like a scrap of paper. To some people, they’re something of great beauty. Well, the appropriate person to collect high-quality stamps is the person who finds them beautiful. The same thing goes for bottles of wine. If you know you have a cellar which contains the finest wines and you gain pleasure from that, that’s an investment that’s worth making.
RP: In a nutshell, emotional assets should be seen as a hobby first and an investment second. Only you can decide whether collecting for investment is worth your while.
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