What are the risks of investing in art and collectibles?
Collectibles are an alternative investment, which means they are not stocks, bonds, real estate, or cash. Some investors jump into collectibles with both feet, assuming they can make their fortune in a world full of schemes, scammers, and fraud.
Knowing this market means recognizing these threats. You can make a fortune buying and selling collectibles, but few do. If you think you can identify these threats and find bargains that may sell for fortunes in the future, please do so; But keep in mind that there are many downsides to investing in collectibles.
Understanding the risks of investing in art and collectibles
Costs and fees
You will always hear stories about someone who spends a few dollars on a garage sale or finds something in the attic and sells it for a fortune. This happens, but it is unlikely to happen to you. If you really want to make money from collectibles, you will have to spend money on valuable items.
- Collectibles are a more difficult investment to understand than average investments, as they carry many risks that more traditional investments do not.
- The main risks associated with collectibles include high costs and fees; lack of investment or dividend income until sale; prevalence of counterfeits; and an above-average risk of asset destruction.
- It is a mistake to believe that collectibles are immune to the performance of the big financial markets; In general, the better the overall market, the better the collectibles markets.
If you plan to keep those items for a long time, they will probably appreciate it, but “probably” is not a guarantee. It is still possible that you will spend a large amount of money and never see a return.
Also, if you are going to pay for handling, storage, marketing and insurance, you will have to pay high fees. In many cases, you will also have to pay for maintenance and restoration.
If you really want to be good at buying and selling collectibles, you will probably have to lose money first. There is no substitute for experience, and the best experience is trial and error.
Tax obligations and lack of income or dividends
The capital gains tax on the sale of a collectible, if it appreciates in value, is a hefty 28%. If you sell a collectible in less than a year, it will be taxed as ordinary income.
Unlike other types of investments, you will not get paid to invest in collectibles. You will receive absolutely nothing from a monetary point of view until the item is sold.
Lack of information and difficult compositions
When you trade stocks, bonds, commodities, and currencies, you have access to a wealth of information that can help steer you in the right direction. While information on collectibles is still available, the amount of detail you can get about a collectible is limited compared to trading anything on public markets.
It is important to look at the comps, but if a comparable antique is valued at $ 10,000, that doesn’t mean your antique is valued at the same amount. Much will depend on the state of the collectible.
Liquidity, Counterfeits, and the Potential for Destruction
Selling collectibles can be challenging because finding a buyer is often difficult.
Counterfeits are everywhere on the collectible market. Take every precaution to make sure you don’t fall into this trap.
If there is a fire or flood in your home, the value of your collectibles can reach $ 0. There are many other scenarios that can lead to the destruction of a collectible. Plan accordingly.
Stock market performance
You will often read that collectibles are not tied to stock market performance. This is true up to a point, but not entirely true. When the stock market is flying, investors have more disposable income, leading to increased purchases of collectibles.
When the stock market falls, investors have less disposable income, negatively impacting the collectibles market.