If given the opportunity, would you consider adding a dinosaur fossil to your investment portfolio? What about a prototype of the first Nike shoe released back in 1972?
Using fractional shares, some online brokerages can now offer shares in rare collectibles ranging from classic cars to national treasures, like the Declaration of Independence. Rather than heading up to the attic and digging through towers of dusty boxes in hopes of finding something Antiques Roadshow-worthy, you can hop on your phone, download an app, link your bank account, and become a partial owner in previously inaccessible collectibles.
But just because you’re able to, does that mean you should?
We look at how collectibles can fit into an investment strategy and what you should consider before investing in them.
The Rise of Alternative Investing
The prioritization of accessibility is becoming a dominant trend, and we’re seeing different industries put their spin on making their respective services available to more people. We’ve seen it happen with stock trading and apps such as Robinhood, in the insurance industry with companies like Lemonade, and now a recent industry joining the movement is the world of collectibles.
From marbles to beanie babies to sports cards, people love collecting things. But historically, when viewing collectibles as an investment, a few problems stood in the way.
First, there was (and still is) an issue with liquidity. Believe it or not, there isn’t always an active market ready to buy a box of vintage trading cards. Also, collectibles tend to have very long-term appreciation, meaning it may be a while before they’re viewed as having any market value. While the exact number is debated, it’s estimated that it takes around 20-30 years for the nostalgia effect to kick in. Meaning something created and collected today most likely wouldn’t hold value and be considered a collectible for several decades.
Which leads us to another problem: How do you determine the price of an item when the value is largely subjective?
There aren’t earnings reports or balance sheets to look at when valuing a collectible like there are with stocks and other traditional investments. This makes it much more difficult to properly research and place a value on.
But any time there are inefficiencies or gaps in the market, technology seeks to close them, and that’s what these new collectible investing platforms are basing their business models on.
Companies such as Rally Road, Collectable, and Otis aim to make investing in collectibles more accessible using fractional share offerings. These companies buy previously inaccessible assets, evaluate the price history, and determine a price to offer shares of it to the public.
This helps solve the liquidity issue as investors can trade their shares on the open market. It also removes some of the risks around determining a value for the collectible because they’re buying more significant, more established collectibles that tend to have more demand. And since investors don’t have to buy the whole asset themselves, they don’t have as much skin in the game so if one collectible doesn’t pan out, it shouldn’t affect their overall financial situation.
Are Collectables A Diversification Tool?
While investing in collectibles may sound like a good time, does it have a place in a prudent investing strategy?
Given that collectibles aren’t correlated to traditional investments such as equities, they could potentially be viewed as a diversification tool. However, keep in mind that diversifying amongst traditional asset classes would still be the priority.
Another way that people frame collectibles as an investment is by viewing the asset as a store of value. Viewing a collectible as a store of value is optimistic, but collectibles do have the potential to appreciate over the long term. The ability to be traded as easily as stocks can potentially create more potential for market-driven appreciation.
What to Consider Before Making Collectibles Part of Your Portfolio
Before deciding if investing in collectibles is right for you, look at your overall financial situation. Tasks such as maxing out tax-advantaged accounts, fully funding an emergency fund, and knocking out any high-interest debt should be top priorities before delving into collectibles.
Also, it’s important to remember that any time you invest, it comes with risk. Even more so when the investments are based on market value rather than intrinsic value, such as collectibles. For example, the intrinsic value of a sports card may only be a few dollars, but the market value could be hundreds of thousands.
The good news is that it’s simple to put your personal passions to work in selecting an investment. If you’ve always wanted a vintage car but didn’t want to cough up hundreds of thousands of dollars to own one, maybe you decide to invest in one using fractional shares. This would give you the ability to trade the shares and participate in the potential appreciation of the asset.
Finally, many of these new trading apps typically keep fees low initially to bring new investors onto the platform. Still, it’s always wise to understand the fees of anything you decide to invest in. For example, one collectible trading app doesn’t have trading or management fees, but they have a 0-10% sourcing fee for finding, analyzing, and doing due diligence on the collectible before its offering.
Buying collectibles as part of your investment portfolio can expand your appreciation and participation in something that has always been a hobby. It’s fun, different, and easy — but remember that it’s also a risk. Upgrading your collection from your basement to your portfolio means doing the research and understanding what you’re investing in before allocating money towards it.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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