Before the onset of the Covid-19 pandemic, the total value of collectibles from private collectors reached about USD 1 trillion. The biggest parts of these are fine art, watches and jewelry, wines, and classic cars.
Collectors have a diverse range of profiles, and they also have diverse motives of collecting what they collect—whether it be pure passion, social recognition, a desire to create a legacy, or for investment purposes. Many collections start with a single acquisition of an object that attracts a person due to the object’s history, beauty, or sentimental value. This unique appeal of collectible to a person is often unexplainable.
According to psychologist Christian Jarret, the desire to collect is an integral part of humankind’s psyche. This was first observed12,000 years ago when our ancestors shifted to settling in one place from being nomadic. Moreover, the biblical character Noah is regarded as one of the first collectors for gathering pairs of animals.
For those collecting items as an investment, it is a great way to diversify their portfolio while enjoying the things they love or are passionate about. Considered an alternative investment, collectibles are different from stocks, mutual funds, bonds, or cash.
Common types of collectibles
Collectibles are any items whose values are higher than their prices during the original purchase. According to a recent search of the Guinness Books of World Records, there are nearly 300 types of collectibles. They are often sorted into categories and subcategories as they come in different shapes, sizes, and price ranges. Some of the common types of collectibles include:
- Fine art
- Timepieces and vintage jewelry
- Classic automobiles
- Antique furniture and houseware
How to determine the value of a collectible
Similar to other assets, the valuation of collectibles depends on many factors, primarily including an item’s supply and demand. An individual collectible has a higher price if its supply is low and its demand is high. Other factors are:
- Condition: Collectibles with extensive damage or repair typically have lower values.
- Rarity: Objects with a limited number of specimens available often attract collectors’ interest. For example, comic books, coins, and stamps may become rare over time as they tend to get lost or destroyed, so their values become higher in the future.
- Authenticity: It is essential for collectors to identify whether an object is authentic or a copy. If it is proven authentic, it will have a higher value.
- Origin: Collectibles, especially luxury ones, with unknown origins pose the risk of being acquired illegally. Seasoned collectors maintain a chain of ownership because illegally acquired objects, when discovered, are returned to their rightful owners.
- Appeal: Items with little appeal to potential buyers tend to have lower values. The appeal can be in terms of functionality, aesthetics, intellectual curiosity, potential financial return, or the ability to connect with one’s past.
Benefits of investing in collectibles
The activity of collecting is often pursued by collectors mainly for the pleasure it brings them and its potential extraordinary gains. Collectors note the following advantages of such activity:
- Personal satisfaction: Investing in collectibles offers the opportunity of following a person’s passion, especially if he is in retirement and hasn’t had the chance to do so during his working years. For some people, collecting a complete set of baseball cards or a set of designer bags from each brand can be satisfying.
- Building social networks: Being a collector helps one build and maintain a social network because collectors are often members of groups with the same interest. They conduct regular meetings and travel together to swap auctions, where they help each other find missing items in their particular collections.
- Diversification of portfolio: As part of the group of unique assets, collectibles can help investors add diversification to their portfolio. Another advantage is that they help reduce losses in an event of an inflation or down stock market because stock market and collectibles move in different directions.
- Confidentiality: In general, transfers on the collectible market are unrecorded and confidential, unlike regulated securities markets. There are some people who prefer to not have the value of their collection known to the public, especially if they possess rare, high-end ones.
- Potential financial returns: Collectibles that are expected to appreciate in value over time are worthy of investing. For example, a collector who purchased a 5-inch ceramic bowl from China’s Northern Song Dynasty for $3 during a neighborhood yard sale was able to sell this for $2.25 million in Sotheby’s auction in 2013.
Investment risks of collectibles
- Price volatility: Mean prices for collectibles can vary significantly due to lack of information and standards. For example, the $3-million worth baseball of Mark McGwire at a 1999 auction significantly decreased in value years later due to McGwire’s suspected steroid use.
- Illiquidity and counterfeits: Due to widespread counterfeits in the market and the difficulty of looking for a certain collectible buyer, collecting can be challenging. Moreover, the holding periods of collectibles may last decades to have them at rarity peak and sell them at a higher value.
- Costs and fees: If a collector wants high returns for his collections, he needs to invest on more valuable items. In addition, costs for handling, storing, transporting, marketing, and insurance can be very expensive depending on the collectible item. Maintenance and restoration might also be required in some cases.
- Tax obligations: Collectors may have special tax statuses—as a dealer, investor, or hobbyist. Each has different consequences. For most, collectibles are recognized as capital assets, where the difference in the purchase and selling prices is considered either as a capital gain or loss. If investment in collectibles is made through a qualified retirement plan, the assets are subjected to tax per IRC Section 408(m)(2). Inability to follow the complex tax rules may result in fines and other penalties.
If you have just started collecting or are a seasoned collector and you are considering selling a luxury collectible, Biltmore Loan and Jewelry has a network of appraisal experts, buyers, and collectors to buy your item at a fair price.