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November 21, 2014

Stamps, art and musical instruments – who’s ready to add them to the portfolio?

Should you consider investing in non-traditional investments such as art, stamps or violins? Dimson and Spaenjers have assessed the long-term financial returns from high-quality collectible real assets with surprising results (1).

Kunst als Anlage - English

Over the period 1900–2012, art, stamps and musical instruments (violins) have appreciated at an average annual rate of 6.4%–6.9% in nominal terms, or 2.4%–2.8% in real terms. But despite the similarity in long-term returns, short-term trends can vary substantially across these different types of emotional assets. What has surprised us most is that collectibles have enjoyed higher average returns than government bonds, bills and gold. However, this has come with much higher volatility.

Annualized real returns from high to low: Equities: 5.2%, Stamps: 2.8%, Violins: 2.5%, Art: 2.4%, Bonds: 1.5%, Gold: 1.1%, Bills: 0.9%.

Despite the surprisingly good historical returns, we remain cautious when considering collectibles as a key building block to create long-term wealth:

  • Risk of theft. This is non-trivial and we would argue that the above quoted performance numbers are too high since nobody in his right mind would hang a Picasso on his wall without paying for insurance against theft. However, the insurance fees would eat up a significant part of those above quoted returns.
  • Potential fraud. Some collectibles have turned out to have quite different origin than what the seller has claimed… This is a risk that investors in financial assets do not face.
  • High transaction cost. Although we may at times complain about high transaction costs for trading shares (up to 0.5%), or for buying property (around 8% in Germany), this pales in comparison to what the big auction houses like Sotheby‘s or Christie‘s charge (up to 25% (2)).
  • Fluctuating tasts. Collectibles that were in high demand 50 years ago, might not be considered attractive anymore today. It is virtually impossible to predict fashion trends over the next >20 years
  • Illiquidity. Auction houses do not hold sales continuously and searching for potential buyers can be time-consuming and costly.

Our view
There is no denying the emotional gains to be had from owning a beautiful painting or playing music on a Stradivari violin. Despite the large costs and many pitfalls, investments in emotional assets can pay off, because of the non-financial yield they provide. As collectibles yes, but not as an asset class to build long-term wealth. We think there are better ways to invest your money.

Source:
1. The Investment Performance of Art and other collectibles (Elroy Dimson, Christophe Spaenjers), September 2013
2. http://artsbeat.blogs.nytimes.com/2013/02/28/sothebys-raises-commissions-following-lead-of-christies/

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