Every now and then you'll read a news story about some hedge fund manager or wealthy investor making a substantial purchase of a rare piece of art or other collectible. You may even have your own collection of stamps, art, or some other unique asset. A 2012 survey by Barclays found that the average high-net-worth individual has almost 10% of his wealth invested in artwork, fine wines, jewelry, etc. Have you ever wondered what the actual return on your investment on these types of investments is, or can be?
Fortunately, Professors Elroy Dimson of the London Business School and Christophe Spaenjers of HEC in Paris have run the numbers for us. They looked at reliable data from various sources such as auction house records and other collectibles dealers to determine the long-term returns of several unique asset classes over the period between 1900 and 2012. Knowing these returns can help you become a better investor so that you can determine if this approach makes sense for you. At the very least, you'll have an interesting cocktail party topic to talk about.
Before we get to the numbers, there are a few things to keep in mind:
1. Collectible assets are are also called "emotional investments" or "investments of passion." For example, I love my personal art collection. It gives me comfort to see the sentimental pieces that I have accumulated over the years hanging on my walls. They are like family to me. The good feeling that they bring to my life is a return that cannot be quantified solely by money. If you're a collector of fine investment wines, for example, you know that you can always drink the collection and enjoy it. The analysis below does not take into consideration the intangible effects of owning such cherished objects.
2. Various types of collectible assets have periods where the gain in price goes sky-high only to be followed by periods of steep losses. For example, art prices had a big boom in the late 1960s and early 1970s, but also had major price declines during WWI, the Great Depression, the 1973 oil crisis, the recession of the early 1990s, and in the 2008 financial crisis.
As you can see from the graph below, investing in any of these asset classes is never a smooth ride.
(reprinted with permission)
Here is the average arithmetic yearly percentage return for each of the asset classes in the chart above ranked from highest to lowest:
Equities (Stocks) 11.2%
T Bills 5.0%
What's interesting to note in these returns is that all of the collectible assets shown in the graph above have, over time, outperformed gold, government bonds, t-bills, and inflation. The exception to this outperformance is equities (stocks). Over the long-term, equities have given you a much better return over all the other asset classes shown.
The professors also point out that investing in emotional assets creates several impediments that equities do not have:
1. Cost - It costs relatively little to trade a share of a stock like Apple Computer. However, buying or selling a piece of art or a rare violin can incur substantial costs from dealer spreads and commissions that can add an additional 25% to the price of the item being bought or sold.
2. Illiquidity - You can sell a stock quickly. Selling a collectible can take time. A lot of time.
3. Changes in tastes - Fads and bubbles come and go. There may be periods where a particular type of art, bottle of wine, or violin may be out of favor. Like hemlines, these trends take a long time to shift and you may find yourself holding on to what was yesterday's treasure that is now considered to be today's 'junque'.
4. Forgeries and frauds - A share of Apple is a share of Apple. You know what you are getting. If you buy a Picasso, you better know what you are doing. While there are always scams in the financial markets, the collectibles market seems to have its own special breed of crooks and thieves.
5. Higher capital gain taxes - When you sell a collectible you may be subject to a higher tax rate on the sale than you would have if you sell a stock that you have held for over a year.
If you are thinking about committing money to investments of passion it's a good idea to make sure that you have a well-diversified portfolio of other financial assets so that you have something to fall back on. Relying solely on your art collection to feed you in retirement could be dangerous. But, if the world falls apart, you can alway drink your wine and play your violin.
(In preparing this blog entry I have relied heavily, with permission, on the excellent paper by Elroy Dimson and Christophe Spaenjers entitled, "Investing in Emotional Assets" published in the 'Financial Analyst Journal.'. The paper has a more thorough explanation of this topic including data sources).