Art and collectibles are known as alternative investments. That is, they're alternatives to stocks, bonds, real estate and cash. Since a work of art can be considered a collectible, even if it's by Rembrandt, it's included in the collectible category for the purposes of this article. (For more, see: Evaluating an Heirloom.)
The biggest advantage of investing in collectibles is the high upside potential. You might know this from personal experience, or a story from a family member. If not, there’s a good chance you have watched PBS' Antiques Roadshow or any of several pawn shop reality shows that have been popular in recent years.
Antiques Roadshow is the best example because the focus is often on people who have no idea what they have. They might have thought that old lamp sitting in the attic was worth $20, until an appraiser spotted the Tiffany mark and appraised it at $200,000.
A huge difference between the expected price and appraisal price is relatively rare, but people find valuable items at garage sales, yard sales, in their attics and at thrift stores all the time. (For more, see: 6 Things You Shouldn't Sell at a Garage Sale.)
A hefty profit is always an investor’s first goal, but there are many other advantages to investing in collectibles. (For more, see: Contemplating Collectible Investments.)
Hedge against inflation: It’s difficult to find investments that gain value above the rate of inflation. Collectibles fall into that category.
Price Uptrends: As of late 2018, collectibles in many categories were in a downtrend, with one common explanation being that millennials don’t like clutter. Even the prices for fine antiques had declined sharply in many cases. But many fine and historical collectibles continued to hit record prices. As with any investment, you have to choose carefully and anticipate trends. Since everything is cyclical, this eventually will change.
Increasing demand: There are a seemingly infinite number of collectible categories in the world, from baseball cards to Murano glass to Civil War weapons. But each one has only a limited number of high-quality examples. Collectibles are rare by definition. That should keep demand for good quality examples high over the long haul.
Some of these items will end up in museums, which will make the available collectibles even more limited and valuable.
Growing middle class: Emerging markets are likely to continue to experience some volatility over the next several years, but the middle class in these markets will continue to grow by millions. That will mean more buyers for collectibles thanks to the disposable income available to those populations.
Not sensitive to interest rates: Most investments are sensitive to interest rates. Collectibles are not, at least not directly. If interest rates increase, investment gains will decline, which will lead to a reduction in disposable income levels. On the other hand, rising interest rates present other types of investment opportunities, so there always will be potential buyers.
For the fun of it: When you buy a stock or a bond, you type in an order on a computer and click send. When you buy a collectible, you’re on a treasure hunt in the real world, which can be a great adventure.
To enjoy it: If you buy a painting and hang it on the wall in your living room, you don’t just have an investment. You have a possession that you can enjoy. When you purchase a stock, you don’t even get a piece of paper anymore.
Long-term investment: This goes beyond the usual definition of a long-term investment. Collectibles can be passed down to the next generation. If you wait decades to sell a collectible, the odds of its value increasing are high.
Global investment: A collectible can be sold almost anywhere in the world. (For more, see: 20 Investments: Collectibles.) Through eBay and other online sites, you can market your collectible globally too.
The Bottom Line
If you want to invest in collectibles, you should have a long-term investment time frame. The longer you hold on to that collectible, the more likely you are to enjoy a substantial return. (For more, see: 6 Weird Ways to Invest.)