What Are the Risks of Investing in Art and Collectibles?
Collectibles are an alternative investment, which means they’re not stocks, bonds, real estate, or cash. Some investors jump into collectibles with both feet, assuming they can make their fortune in a world filled with schemes, con artists, and fraud.
Knowing this market means recognizing these threats. You can make a fortune in buying and selling collectibles, but few do. If you think you’re capable of identifying these threats and finding bargains that can be sold for fortunes at future dates, then go for it; but keep in mind that there are many disadvantages to investing in collectibles. (For more, see: Contemplating Collectible Investments.)
Understanding the Risks of Investing in Art and Collectibles
Costs and Fees
You'll always hear stories about someone spending a few dollars at a garage sale or finding something in the attic and selling it for a fortune. This does happen, but it’s not likely to happen to you. If you really want to make money in collectibles, you’re going to need to spend money on valuable items.
- Collectibles are a more difficult investment to understand than average investments, as they come with many risks that more traditional investments do not.
- Major risks associated with collectibles include high costs and fees; a lack of investment income or dividends until sale; prevalence of counterfeits; and a greater than average risk of destruction of the assets.
- It is a mistake to believe that collectibles are immune to the performance of the greater financial markets—in general, the better the overall market, the better the collectible markets.
If you plan to hold those items for a long time, they probably will appreciate, but “probably” isn’t a guarantee. It’s still possible that you will spend a large amount of money and never see a return.
Also, if you’re going to pay for handling, storage, marketing, and insurance, you’re going to be paying high fees. In many cases, you also will have to pay for maintenance and restoration. (For more, see: Should You Insure Your Collectibles?)
If you really want to be good at buying and selling collectibles, you’re probably going to need 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 one year, it will be taxed as ordinary income. (For more, see: What You Need to Know About Capital Gains and Taxes.)
Unlike other types of investments, you will not be paid for investing in collectibles. You will receive absolutely nothing from a monetary standpoint until the item is sold.
Lack of Information and Difficult Comps
When you trade stocks, bonds, commodities, and currencies, you have access to a wealth of information that can help lead you in the right direction. While there is still information available on collectibles, the amount of detail you can learn about a collectible is limited compared to trading anything in public markets.
It’s important to look at comps, but if a comparable antique is appraised at $10,000, that doesn’t mean your antique will be appraised for the same amount. A lot will depend on the condition of the collectible. (For more, see: How to Cash in Your Heirlooms.)
Illiquidity, Counterfeits, and Potential for Destruction
Selling collectibles can be challenging because it’s often difficult to find a buyer.
Counterfeits are everywhere in 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 may go to $0. There are many other scenarios that can lead to the destruction of a collectible. Plan accordingly. (For related reading, see: Biggest Millionaire Flops.)
Stock Market Performance
You often will read that collectibles aren’t tied to the performance of the stock market. This is true to an extent, but it’s not entirely true. When the stock market is flying, investors have more disposable income, which leads to increased purchases of collectibles.
When the stock market falls, investors have less disposable income, which negatively impacts the collectibles market. (For more, see: Disposable Income: Its Impact on the Stock Market.)