Wednesday, February 20, 2013

Non Traditional Investments

I have been watching an inordinate amount of reality television lately including but not limited to Pawn Stars, American Pickers, American Restoration, American Guns and Fast ‘N Loud.  All of this has had the unfortunate consequence of getting me interested in non-traditional investments.

My definition of traditional investments includes stocks, bonds, commodities and real estate.  Non-traditional investments could include anything from beanie babies to cars to art.  Typically these collections or purchases start as a hobby and the market gets developed by small businesses until a collectors market develops.  This is most easily seen in coin and stamp collections which have a certain universal appeal.  Baseball and other trading cards could fall into this sphere as well.  Classic and exotic cars typically will go up in value.  I don’t understand the art market in terms of moderns, but classic pieces have a universal appeal.  Firearms have a well defined collectors market as well.

Success depends upon buying low and selling high.  It takes a very astute eye and a tremendous amount or education to succeed in any collectors market.  Grading could be the easiest part of the process.  Counterfeit goods can quickly ruin the ignorant investor.

Certain non-traditional investments also have a significant holding cost.  While all purchases could be insured, a garage and upkeep is needed for cars, a temperature humidity controlled cellar is required for wine investments, and vases or sculptures can be quite delicate.

These considerations aside, non-traditional investments can be cyclic and something that is currently hot, may fall out of favor for 10 years before returning.  These investments are also illiquid.  The best price will only be reached at auction under the right conditions.  If you need to pay for college, that may not work out for you.  Even at auction, buyers take into consideration the buyer’s premium which is 15% or more.  If you sell based on consignment, the seller usually only gets 85% of the sales price.

With those points made, it is reasonable to put a percentage of your portfolio into non-traditional investments.  The dividend is enjoying the beauty and history of these items during your ownership.  The absolute return may or may not be there, but with investment grade pieces (greater than $10,000), the risk is lower.

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