Why collectables are not investments

Why collectables are not investments

Classic cars, antiques, paintings and fine wine have all attracted growing numbers of investors in recent years. They're tangible, beautiful and often deeply enjoyable to own. But do these so-called collectables actually make financial sense as investments? The evidence suggests they're far riskier, and far less rewarding, than most people assume.

In this video, Jens Hagendorff, Professor of Finance at Edinburgh Business School, explains what the research really shows. Collectables tend to provide returns very similar to bonds, but with riskiness very similar to equities. In other words, you're getting a fairly low return over a long period, at a very high price in terms of risk. On top of that, transaction costs can be enormous. Buying or selling through auctions can mean double-digit percentage costs, and assets like wine or physical metals carry substantial storage costs too. Taken together, the costs are considerable and the returns simply don't justify them.

You'll learn why collectables are so risky despite being tangible assets. The answer lies in the market itself. Stocks can see thousands of buys and sells every minute, so if a price drifts out of line with what's justified, other investors quickly step in to correct it. Auction off a painting, by contrast, and you might have a handful of buyers in the room and a few more on the telephone. These markets are, in an economist's terms, far less efficient, and far less reflective of true underlying information.

You'll also learn about one of the most common mistakes investors make: assuming collectables are good diversifiers. They aren't. Fine art prices correlate highly with stock market returns, often because investors who've made money in the markets then spend some of it on art. When the stock market drops sharply, so do prices at the auction houses, which means collectables offer far less protection than investors expect.

The takeaway: if you'll genuinely enjoy owning a classic car or a beautiful painting, that pleasure may well justify the purchase. But if your aim is to invest in an asset that delivers a good return for an acceptable level of risk, collectables don't qualify. They're very risky, and returns on average are fairly modest. The real question to ask yourself is simple: would it really matter to you if the monetary value fell substantially? If it would, collectables probably aren't for you.

Chapters / Key points

• Why more people are investing in collectables
• What returns collectables actually deliver
• Bond-like returns with equity-like risk
• The huge transaction and storage costs involved
• Why collectables markets are far less efficient than stock markets
• Why fewer buyers means less reliable pricing
• The myth that collectables are good diversifiers
• Why fine art correlates closely with stock market returns
• Why enjoyment, not returns, should drive the decision

Transcript

Why collectables are not investments

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 auctions to buy or sell these items, you're looking at double-digit percentage transaction costs. If you're using other means of exchange, 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.

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.