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. Someone who knows the market well will recognize these threats and can make their fortune in buying and selling collectibles, but these people are rare. 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 that you should know about prior to getting involved. (For more, see: Contemplating Collectible Investments.)

Cost: 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 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. (For more, see: 6 Major Collectibles Payoffs.)

Tax obligation: The capital gains tax on the sale of a collectible 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.)

Lack of information: 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.

Difficult comps: 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.)

Illiquid: Selling collectibles can be challenging because it’s often difficult to find a buyer.

Counterfeits: They’re everywhere in the collectible market. Take every precaution to make sure you don’t fall into this trap.

Experience is expensive: 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.

No income or dividends: Unlike other types of investments, you will not be paid for investing. You will receive absolutely nothing from a monetary standpoint until the item is sold.

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.)

High fees/costs: If you’re going to pay for handling, storage, marketing and/or 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?)

Potential for destruction: If there is a fire or flood in your home, the value of your collectibles will 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.)

Investing in collectibles can lead to significant returns, but there are many risks. Even if you avoid these risks, you still have to account for all the taxes, fees and costs. However, if you bought a collectible for $500 10 years ago and it’s now being appraised for $8,000, you’re not going to be too upset. (For related reading, see: Top Alternative Investments to the Stock Market.)