What Are the Downsides of Investing in Collectibles?

The Downsides of Investing in Collectibles

Fans of TV shows like Antiques Roadshow or American Pickers may talk about getting rich from their collectibles. But if we’re being honest, you’re probably not going to make a million bucks from the junk you have been holding onto in your attic. While there are a few people who have gotten lucky and made a small fortune, it isn’t the typical outcome. Investing in collectibles requires a considerable amount of time, knowledge, and money before you ever see returns. There are several downsides of investing in collectibles that people overlook. And as with all investments, you should be aware of the inherent risks of alternative assets before buying anything.

What Are Collectibles?

If you are thinking about investing in collectibles, it’s best to start with an understanding of what they are and are not. Collectibles are an alternative type of investment that does not include stocks, bonds, cash, or real estate. It refers to any item that is far more valuable than the initial sale price because of its popularity or rarity.

The word “antique” and “collectible” are often used interchangeably. However, there is a distinct difference. While antiques can be collectibles, not all collectibles are old. A collectible could include just about anything from antiques and coins to toys and comic books. Because of the detailed knowledge and wide variation, it makes it much more difficult to assess the value of these types of assets.

Why Are People Investing in Collectibles?

Many investors choose to put their money into collectibles because they already do it as a hobby. Ambitious collectors hope to turn their interests into income by investing in super-rare and valuable items. These items offer greater diversification in your portfolio and generational wealth that can be passed on.

There are also tons of people who hear news reports of yard sale treasures and thrift store finds that turn out to be worth a fortune. These stories cause people to flood the market and drive up prices. While this can be great if you are already collecting, it also makes it difficult to find items worth investing in. Those who are looking at saturated markets aren’t likely to find rare collectibles that will fetch a high price at auction. However, it doesn’t stop opportunists from trying.

What Are the Downsides of Investing in Collectibles?

Although many tout the benefits, there are several downsides of investing in collectibles you should consider before you do anything.

1. The Financial Investment

First, there is the initial cost to buy the collectibles. You will rarely find cheap deals. True collectors know you must spend money for quality items. Then, there are the costs of handling, storage, maintenance, restoration, insurance, shipping…the list goes on. You may actually lose money in the beginning.

And, let’s not forget you also have to pay 28% in capital gains tax for the sale of collectibles you have owned for more than a year. That alone could undercut any returns on your collectibles.

2. The Time Investment

From my experiences, the greatest deterrent is the time factor. Unlike other investments, there are no returns until you sell the item. And, you may have to wait several years for it to appreciate in value.

It also takes time to research and become an expert on your collectibles. You’ll need to learn how to recognize them, assess their rarity and condition, and locate buyers willing to pay top dollar. This adds up to a considerable amount of time. If you aren’t seeing high returns, it may not be worth your time.

3. The Learning Curve

In the same vein, there is also the learning curve to consider. Unfortunately. you’ll have to educate yourself. While there is a wealth of information for investors trading in stocks, bonds, and more common commodities, it’s harder to find similar resources for collectibles.

You can still find tons of information. But, you have to cultivate an intimate and detailed knowledge about your collectibles. And, you must also understand how their condition and rarity affect their value. For extremely scarce items, it is also difficult to find comps and make a fair assessment.

It takes longer for some to learn these things. However, experience is the best teacher. Many people who become successful collectors simply learn through trial and error.

4. Counterfeits

Another of the downsides of investing in collectibles is the risk of buying counterfeits. There will always be people out there trying to scam people out of their money. Unfortunately, collectibles are no exception. There are many convincing counterfeits that could cost you a lot of money.

5. No Guarantees

Although some become more valuable over time, there is no sure-fire guarantee with collectibles. Furthermore, many items are marketed as collectibles, but that doesn’t necessarily mean they will appreciate in value. It’s possible that you may spend a lot of money for no return on your investment. Or, if the assets are damaged or destroyed, they become worthless.

The truth is that no one can guess what the next high-dollar collectible will be. And, collectibles are notoriously volatile since it is a highly specialized market. Demands change, causing some markets to crash as quickly as they rose. While some types are more stable than others, you never really know.

Tips for Investing in Collectibles

There are many downsides of investing in collectibles. But if it’s something you love, it can still bring you joy even if it doesn’t bring you profits.

  • Learn as much as you can. It will serve you well to know what’s worth buying and what’s not. And, it will also make it harder for people to take advantage of you.
  • Be cautious. There’s no regulating body for this type of asset and many sales are private. So, there’s no one to complain to or help you seek justice if you get the raw end of a bad deal.
  • Be patient. Collectibles are illiquid assets. It takes time to connect with someone who knows their value and is willing to pay it.
  • Take care of your collectibles. The condition is a huge factor in an item’s value. So, you’ll want to insure them against damage, properly store them, and do what you can to repair/restore them to their original condition.
  • Know your limits. Collecting can quickly turn into hoarding if you are trying to collect anything that might hold value someday. These items will overrun your home, so choose something to narrow your focus.

Do you invest in collectibles? Share your experiences with us!

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