Investing in your passions can be extremely rewarding. Not only does it help you enjoy your wealth, but it also provides diversification and return potential. But there are also serious risks to consider when investing in luxury collectibles, from fraudulent goods to significant hidden costs.
Contrary to popular belief, passion investing isn't just another fad. The concept dates back to Edwardian and Victorian times, when curios from worldwide travels were traded amongst the elite and the money raised was used by explorers to fund their upcoming expeditions1.
Such curios gained their value through their apparent rarity – and what we consider collectibles today will include almost any object of desire that people take pleasure from owning.
According to the Knight Frank Luxury Investment Index (KFLII)2, the top ten types of passion investment, as at Q2 2017, are:
8. Coloured diamonds
9. Antique furniture
10. Chinese ceramics
What are the benefits?
Passion investing is ultimately about the joy of owning a particular asset – like taking your Aston Martin DB5 for a spin at the weekend or wearing a Patek Philippe wristwatch to an important event.
Nevertheless, investment-grade collectibles can also provide diversification benefits and help to hedge against inflation. As a physical store of wealth, they are also unlikely to entirely lose their value – at least not overnight – and they can be an additional source of investment returns. In fact, the KFLII has risen in value by 5 per cent over the 12 months to the end of Q2 2017, outperforming other safe-haven asset classes like gold and prime London residential property3.
Passion investing is ultimately about the joy of owning a particular asset – like taking your Aston Martin DB5 for a spin at the weekend...
What are the pitfalls?
Despite their attractiveness, the rarity of collectibles means that they are often subject to fraud or forgery. As such, investors must do their homework before buying a passion asset, in order to determine its authenticity, provenance and legal ownership.
This will likely require the help of specialist third parties, who should also be able to assist in determining the asset's true value - something which is highly subjective when it comes to passion investments. Even if you do end up buying a genuine Rembrandt or a real bottle of Romanée-Conti DRC 1990, there will still be strings attached.
High insurance premiums are par for the course with passion investments, together with storage costs. Paintings by Old Masters, for instance, must be kept in strong rooms and never hung on walls. Likewise, fine wine must be stored professionally, and at the correct temperatures, to ensure its future value.
Elsewhere, passion assets aren't necessarily the most liquid. Given their niche appeal and high-ticket price, it is often a question of waiting for the right buyer to come along – investments of passion can rarely be liquidated overnight. What's more, selling (and indeed buying) passion assets also typically involves the services of a specialist auction house, and commissions can be high, often in the region of 20-30 per cent.
Should I invest?
When considering purchasing an 'object of desire' it is important to remember that passion investments do not provide an income. Their return potential lies in their capital growth, which can take many years to materialise – and there is no guarantee that their value won't decrease, either.
But as much as passion investing has its pitfalls, with the right specialist knowledge and insurance, it can be a great way to enjoy your wealth, and potentially see a return on your investment.
Lombard Lending, or borrowing against your investment portfolio, is a way of releasing liquidity to acquire passion items, whilst staying fully invested in the market. If this is something you might be interested in, please contact your Relationship Manager or Investment Counsellor, who will be able to ascertain how Lombard Lending might be able to help you.