Why collectables are not investments

Summary

The video explores the financial implications of investing in collectibles like classic cars, antiques, and fine art. It highlights that while these investments may offer returns similar to bonds, they come with significant risks, high transaction costs, and storage fees. The market for collectibles is less efficient than stocks, making it a poor diversifier. Despite their tangible nature, the returns on collectibles are often modest. For those considering them purely as investments, the video concludes that they may not be the best option due to their high risk and relatively low returns.

Takeaways

• 😀 Collectibles, like classic cars, antiques, paintings, and fine wine, are becoming popular investments.
• 😀 Returns on collectibles are similar to bonds, but their risk level is much closer to equities, making them higher risk.
• 😀 Collectibles typically provide modest returns over long periods, but come with significant risk.
• 😀 Transaction costs for buying and selling collectibles, especially using options or physical exchange methods, can be very high (double-digit percentage).
• 😀 Storage costs and other fees add additional layers of expenses for investments in items like wine and metals.
• 😀 The market for collectibles is less efficient than stock markets, with fewer buyers and sellers, which affects price stability.
• 😀 The less efficient nature of collectible markets means their prices are not always reflective of true value, unlike stocks.
• 😀 A common misconception is that collectibles are good diversifiers. In reality, their prices often correlate with stock market trends.
• 😀 Fine art and other collectibles are often bought by investors who have made money in the stock market, linking their prices to stock performance.
• 😀 If you're looking for a good investment with low risk, collectibles are not the right choice due to their high risk and modest returns.
• 😀 Collectibles can be enjoyable to own, but if the goal is financial gain, they should not be seen as reliable investments due to their risk and modest returns.

Q & A

What types of assets are considered collectibles in the context of this script?

The types of assets considered collectibles in the script include classic cars, antiques, paintings, and fine wine.

How do collectibles compare to bonds and equities in terms of returns and risk?

Collectibles provide returns similar to bonds, but the riskiness of these assets is more akin to equities. This means they offer lower returns over longer periods but come with higher risks.

What are some of the significant costs associated with investing in collectibles?

Some significant costs involved in investing in collectibles include high transaction costs, especially when using options to buy or sell items, and large storage costs, particularly for items like wine or physical metals.

Why are collectibles considered particularly risky investments?

Collectibles are considered risky because they have less active markets compared to stocks. Unlike stocks, which have many buyers and sellers, the market for collectibles can be much smaller and less efficient, which makes pricing more volatile and harder to predict.

What does it mean for a market to be 'less efficient' in this context?

In the context of the script, a less efficient market refers to a market where prices do not reflect the true underlying value of the assets. This happens because there are fewer transactions and less liquidity, leading to greater price volatility.

Are collectibles good diversifiers for an investment portfolio?

No, collectibles are not good diversifiers. The prices of collectibles, such as fine art, often correlate highly with stock market returns, meaning they don't provide effective diversification for those looking to reduce risk in their portfolios.

Why might someone invest in collectibles if the financial returns are modest?

Some people invest in collectibles for enjoyment, such as owning a classic car or a piece of artwork. If the primary motivation is personal pleasure rather than financial gain, the investment may still be considered worthwhile.

How do the prices of collectibles correlate with the stock market?

The prices of collectibles, like fine art, often correlate highly with stock market returns. This happens because investors who make money in the stock market may choose to invest some of their earnings in collectibles, especially for decorative purposes.

What is the 'bottom line' advice for investors considering collectibles?

The bottom line advice is that if the monetary value of the investment falling significantly matters to you, collectibles probably aren't the right investment. They come with high risks and modest returns, making them unsuitable for those seeking a stable financial return.

Should an investor focus on collectibles solely for financial reasons?

No, investing in collectibles solely for financial reasons is not advisable. These investments are very risky and generally offer modest returns, so they should not be relied upon as a primary investment strategy.