Investing in collectibles: Understanding risks, tempering expectations

This article will ... Describe the wide range of collectible markets and how each has its own peculiarities and risks.  Note the risks around new digital types of collectibles that are emerging. Warn of the danger that many people overestimate what old collections may be worth.

It’s possible for anything to be an investment if it appreciates in value over time, including vintage cars, baseball cards, fine art, fine wine and, more recently, digital assets called NFTs. But this alternative investment category — that is, buying and selling collectibles — requires special understanding of the risks and tempering expectations of a reasonable return on investment.

There are many reasons people collect hard assets: General interest, tangibility, sentimental connection, the thrill of the hunt, to name a few. If these cherished objects also appreciate in value, that’s a bonus.

But if one is simply looking at collectibles as investments, there are caveats going in:

• The only way to determine value is by finding out how much someone else is willing to pay for it. An object’s desirability is one factor that affects value, rarity is another.
• That gives items that are out of production, or those produced in limited quantity, the potential to become “collectible.” But age is not a determining factor itself ― not all “old” things are collectible or valuable.
• Collectibles are far less liquid than traditional securities. This is not ideal if you need money quickly. Highly valuable objects are a very considered purchase. There’s a due-diligence process involved, just like buying a home. The seller wants top value, while the buyer wants to ensure they’re receiving fair value for their money, too. For a collectibles seller, this might mean securing appraisals or certificates of authenticity prior to listing. And then there is the negotiation process. The result is a prolonged path to liquidity.

The degree to which these concerns factor in also depends on what area of the collectible spectrum is involved and how much money will be committed.

Collectibles at every value range

The lower end of the collectible spectrum holds many relatively affordable options such as baseball cards, comic books, children’s toys, and figurines. A quick scan through eBay, Facebook Marketplace, or Craigslist will yield countless options in these categories. And there is a wide range of literature and forums where collectors can educate themselves.

Typically, higher-priced investment collectibles include classic cars, pieces of art, jewelry, watches, furniture, and vintage fashion.

And there can be collectible investment cross-over. A stamp or coin collection can be a moderate-cost hobby or, with the right acquisitions, a significant asset.

It’s at that point ― where acquisitions turn from fun to funds ― that it’s wise to consult experts, beginning with your financial professional to understand the impact such investing may have on your financial planning. Second, consult experts in the collectible area you are contemplating, as these niche, investment grade collectible markets can shift quickly and have their own peculiar characteristics.

Take, for instance, the classic car market. It has been “absolutely on fire since fall 2020,” said Lew Bednarczuk, owner of Classic Motorcars in Jacksonville, Florida, as some people looked for hard assets due to equity market instability.

But there are pitfalls for the inexperienced. He cautioned that many collector vehicles have been “over-restored,” where much of their originality is replaced, literally, with low-quality, aftermarket parts. The vehicles may look pristine to the untrained eye, but “this class is usually the first to drop in value when a market adjustment comes along,” he said.

Another important distinction between owning stock in Ford versus owning an old Ford is that classic cars require careful maintenance, specialized storage, as well as insurance. This is in addition to the costs of acquisition ― like auction fees or commissions ― which usually come with buying vintage cars.

All of this affects price stability and returns. That’s why Bednarczuk and other experts will tell you from the outset — a love of cars should take precedence over investment expectations.

The same considerations should be kept in mind for other types of high-end collectible investments, like paintings, prints or photography: Each individual market is incredibly fickle and has its own peculiarities. This means you’ll likely need the help of a professional.

Because art is generally one-of-a-kind, you may not know the value of your piece until you sell it since there may not be individually direct comparisons. Works by known artists may be an exception but will likely have a higher buy-in cost.

NFTs: A relatively immature market

Speaking of art, a new category of digital collectible ― non-fungible tokens (NFTs) ― is emerging as well.¹ An NFT is essentially digital artwork built with unique, identifying computer code. The first known NFT ― a short video clip created by digital artists, Kevin McCoy and Anil Dash ― was minted in 2014. Over the last few years, NFTs have surged in popularity.

But, as with many digital frontiers – especially those enmeshed in the volatile world of cryptocurrency ― there can be growing pains. In fact, a recent survey revealed that more than 58 percent of respondents haven’t made money in NFTs.² While NFTs continue to see strong activity, and creation continues at a torrid pace, average sale prices have fallen considerably. ³ 

And so NFTs remain highly speculative in nature. And the same general investing advice for collectibles applies ― learn the market, research what you’re buying, and consider your exposure.

Treasure in the attic?

Meanwhile, there are those who ― while perhaps not actively seeking out collectible investment opportunities ― believe they already have some holdings. But, if you’re like thousands of comic book or trading card collectors waiting for your trove to deliver huge returns, your patience is not necessarily going to be rewarded.

The reality for most comic book aficionados is that collections they believe are worth thousands are actually only worth a few hundred, especially if they were printed in the ‘80s and ‘90s. (Hint: The Death of Superman isn’t worth nearly as much as you’d think – about $30 as of this article’s publication.)⁵ For appreciation in value, look for first appearances by major characters or particular comics and genres that are well-preserved, rare and likely published decades ago.⁶

Trading card sales increased by 142 percent from 2019 to 2020 according to an eBay report, so there’s plenty of activity.⁷ But baseball card experts say that to increase your chance of making money, invest in big-name players’ cards in mint-graded condition. Know, however, that you’ll likely have to spend several thousand dollars – or much more – to get a seat at the table for names like Mickey Mantle, Honus Wagner, Mike Trout, and of course, Babe Ruth.⁸ This obviously applies to the giants in other sports too.

Here's an extreme example to illustrate the point: In November 2020, a rookie Mantle card graded PSA Mint 9 – one of only 6 with that grade – sold for $5.2 million.⁹ That same card was purchased about 2 years earlier for $2.88 million, which trounces the S&P returns during that time period. It’s unclear whether that is a repeatable strategy, but if you’re willing to try, be sure to know what to look for first.¹⁰
 

Collected wisdom

Collectibles items can offer the potential for good return on investment. They do, however, often require a sizable stake to get in the game, are subject to risks beyond more typical investments, and may incur a variety of fees and sales charges. This may run counter to how most people like to invest.

If you’re set on investing in a collectibles category, get expert advice so you know what you’re buying, and work with reputable dealers who know where the market is heading. You may also want to consult your financial professional to understand the impact such investing may have on your budget and estate planning, not to mention the potential for the IRS to assess capital gains tax when you sell the collectible.¹¹ Of course, don’t invest more than you can afford to lose if the investment doesn’t perform as hoped.

And most of all, enjoy the items for what they are first, and as investments second.

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This article was first published in June, 2016. It has been updated.

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