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Robin Powell: There’s been an increase in recent years in the number of people investing in so-called collectables.
Examples include classic cars, antiques, paintings and fine wine.
But do these sorts of investments make financial sense? Jens Hagendorff is Professor of Finance at Edinburgh Business School.
Jens Hagendorff: There is some very good evidence out there, which basically says that those types of investments provide returns that are very similar to bonds but the riskiness of these assets is very similar to equity. So you’re getting a fairly low return over a longer time period, but at a very high price in terms of riskiness. And next to the riskiness, investors in collectables also have to bear in mind that the transaction costs can be very large. That is, if you’re using options to buy or sell these items, you’re looking at double-digit percentage transaction costs. If you’re using other means of exchanges, those always include very large transaction costs – for wine or physical metals, there are large storage costs involved. So, there are huge costs involved and the returns, overall, don’t justify it.
Robin Powell: So, why are collectables particularly risky? They are, after all, tangible assets.
Jens Hagendorff: My hunch is that there is less of an active market in these types of assets. So when you’re looking at stocks, you’re looking at potentially thousands of buys and sells per minute in some of these stocks. If the price of these stocks were to be out of line with what is justified, other investors would jump in, bring the price up or down to a level that is justified. If you’re looking at – I don’t know, auctioning off a painting – and you may have a few buyers in the room and a few on the telephone, you are looking at a very different type of market. So these markets, to use an economist’s term, are less efficient; are less reflective of true underlying information than stocks are.
Robin Powell: A common mistake that investors make is viewing collectables as good diversifiers. They’re not.
Jens Hagendorff: The prices of fine art correlate very highly with stock market returns. It’s often because investors, who may have made money in the stock markets, then decide to invest some of that money in art for their offices, for instance. So there is that link, meaning it’s not a very good diversifier for those types of investors who are interested in diversifying away from the standard asset classes because they will find there is still a big correlation. The stock market drops sharply, so will the prices of art at auction houses, for instance. 14.39
Robin Powell: Ultimately, you have to decide whether you will really enjoy owning, say, a classic car or a beautiful painting. You certainly shouldn’t invest solely for financial reasons.
Jens Hagendorff: There are investors who will greatly enjoy owning particular artwork. And if they get enough enjoyment out of this, then that’s absolutely fine.
But nonetheless, if the point of that purchase is to invest in an asset that you expect to give you a good return for an acceptable level of risk, it’s not a good investment. It’s very risky and returns, on average, are fairly modest.
Robin Powell: So, the bottom line is, does it really matter to you if the monetary value of your investment falls substantially? If it does, then collectables probably aren’t for you.