The Risks of Investing in Art and Collectibles

Collectibles are an alternative investment, which means they’re not stocks, bonds, mutual funds, exchange-traded funds (ETFs), 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.

What Qualifies as Art and Collectibles?

Everyone has their own definition of the words art and collectibles. Some people consider their kids' grade-school paintings to be art or they may think that the baseball cards they inherited from their uncles are collectibles. These definitions may ring true for many but they may not align with how they are defined in the market.

What makes art "art" is truly subjective. And this fluidity can also translate to its value. In general terms, though, the value of art or fine art is often determined by a few common characteristics, including its:

• Commercial Value: How much does it cost? This is determined through a collective consensus, usually by appraisers and professionals in the fine art world.
• Social Value: This refers to how it communicates. How does it speak to the audience? What emotions and reactions does a particular piece of artwork evoke?
• Intrinsic Value: This is something that can't be determined by numbers alone and also involves emotions. But to go even further, the intrinsic value of a piece of art also relates to how unique it is and whether it is replaceable.

Collectibles are any items whose values are higher than their original purchase price. Some of the most common collectibles include antiques, coins, comic books, baseball cards, stamps, and toys. The value of collectibles depends on several factors, including their condition and how many other similar items are available on the market. These items can go for a pretty penny if they are rare and in mint condition. As such, they aren't as common as you may think.

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.

If you plan on holding those items for a long time, they will probably appreciate in value. But it isn't a guarantee. It’s still possible that you will spend a large amount of money and never see a return.

And if you’re going to pay for handling, storage, marketing, and insurance, you’re going to pay high fees. In many cases, you also will have to pay for maintenance and restoration.

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.

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.

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.

Stock Market Performance 

You may hear that collectibles aren’t tied to the performance of the stock market. There's a double-edged sword to this belief as there's some degree of truth and untruth involved here. Investors have more disposable income when stock market values rise, which leads to an increase in purchases of collectibles. When the stock market falls, that disposable income drops, which negatively impacts the collectibles market.

So how has market performance compared to collectibles? From 1995 to 2021 (latest information available), contemporary art returned 13.8%. The S&P 500 during the same period had an average inflation-adjusted return of 7.89%, excluding dividends (10.48% with dividends).

The Bottom Line

Investing in art can be a lucrative endeavor if you have the money, patience, and risk tolerance. Art can be hard to evaluate and what is in trend and popular changes over time. Historically, it shows investing in traditional securities, such as the stock market (depending on the stocks), provides a better return.