Serious Risks
Notwithstanding the attractive long-term appreciation of many collectibles, there are considerable downsides to these investments. For starters, fashion is fickle.
"Parts of the antique furniture market are languishing because they've fallen out of favor," says Artvest's Plummer. He says collectors just aren't as interested in 18th and 19th century art and furniture as they were 15 years ago. "Today's collectors want to collect the art of their time and the designs of their time."
It's hard to predict what will be en vogue (read saleable) in the future. "Investors are looking at the contemporary art market to find the next big artist before everybody else does. That's where they're going to make the most money, but that's also the riskiest part of the market because it's akin to finding the next Google," he says.
Plummer says Artvest tries to give objective advice to its wealthy clients, so they're not just relying on what they see other investors buying, or on what galleries and auction houses are pushing. "The art market is quite complicated. Connoisseurship is something you can't pick up overnight. It's learned over time by looking at objects and training one's eye and learning about artists and the best periods of their work," he says.
Industry insiders agree that buying fine art and other high-end collectibles requires the advice of experts who thoroughly understand the type of collectible and can realistically value it. Clients should only buy collectibles at a premium to avoid missing a once-in-a-lifetime opportunity to obtain something they truly desire, not because they were charmed by the seller or the seller's agent.
It's also essential to invest in things that others will eventually want to buy. "One person's passion is another person's poison," says fourth-generation estate planning and trust attorney Matt Erskine, a principal in the Worcester, Mass.-based Erskine Company LLC, which helps clients acquire, manage and transfer ownership of unique family assets.
Erskine's clients collect everything from Revolutionary War-era sheet music to erotic netsuke (miniature sculptures created in 17th century Japan), which Erskine describes as the Internet porn of its day.
With high-net-worth clients buying all manner of unique items, from thoroughbred racehorses to classic cars, how can an advisor tell the difference between a rock-solid investment and an overpriced indulgence? Erskine offers this heuristic advice: "It's not an investment if you have to feed it or fix it," he says, quoting a pithy lesson he got from his 89-year-old father.
Erskine recommends Collectible Investments for the High Net Worth Investor by Stephen Satchell for details about which collectibles might make good investments. He also likes The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art by Don Thompson for its insight into the odd economics and psychology of the contemporary art world.
As if choosing the right collectibles weren't hard enough, there are plenty of other traps for the unwary. Some segments of the collectibles markets are notoriously illiquid, in part because one-of-a-kind pieces make it hard for experts, let alone buyers and sellers, to agree on their value. Other segments are subject to outright manipulation or fads that drive prices up, only so later they can rapidly collapse. Although it's possible to turn quick profits on collectibles, 10 years is a more realistic holding period for many items.