Luxury items are more than fashion statements designed to bolster your social profile. Expensive goods like watches, art, and classic cars can play an important role in diversifying your financial portfolio.
However, investing in luxury items can be precarious. Macroeconomic market trends and unexpected changes to brand reputation can tank the value of your designer bag collection or classic car. Even works created by high-profile artists like Picasso are subject to scrutiny and may experience a drop in value due to an exposé that reveals bad behavior in life.
You also need to time your purchase wisely if you want to see a rise in your net value. Timing your purchase correctly ensures that your assets work for you. Similarly, you should probably pursue traditional forms of investment before betting your savings on the value of a designer handbag. This will keep you safe from unpredictable swings in value and help you protect your long-term financial health.
The Benefits
Investing in jewelry and avant-garde art may seem like a frivolous way to spend your hard-earned money, but wise investments in luxury goods can actually support your total net worth. Depending on your overall portfolio, luxury goods may be a more solid investment than you first thought.
Diversification
As your portfolio grows, you need to embrace a range of investment strategies. Diversifying your portfolio can reduce your risk and help safeguard against losses, and benefit from economic upturns.
Investing in luxury goods is particularly important if you want to manage risk related to macroeconomic factors like inflation or changes in the stock market. Investments like art are not impacted by changes in the stock market. Art has intrinsic value, and pieces are valued based on their exclusivity rather than general changes in the market. This can protect you against market volatility and help you achieve a balanced portfolio.
Appreciation in Value
High-quality, rare luxury items can be a great way to build a growing portfolio. Vintage, well-made goods like classic cars, celebrity-owned memorabilia, and high-end watches can grow in value over time and achieve a resale value that outpaces inflation and market growth.
Appreciation in value can be particularly lucrative if you have an understanding of the market and time your purchase and/or sale with swings in value. For example, a 2023 sale of Freddie Mercury memorabilia by Sotheby’s will likely benefit from the 2018 biopic “Bohemian Rhapsody”. It is estimated that the lyrics hand-written by the lead singer will fetch up to £300,000 at auction due to his popular public profile.
Enjoyment and Prestige
When was the last time you visited the bank or stock exchange for enjoyment purposes? Unless you live to trade, you likely see investing as a boring but important part of life.
However, investing in luxury items can be extremely rewarding. You get to enjoy tangible assets like art, cars, and watches. Even if you never plan to sell them, collecting luxury goods can add real value to your life and serve as a well-earned reward after a strong financial year. If you do decide to sell, seeing a rise in your net worth is satisfying. It signifies that you understand luxury goods and can read the market.
The prestige of owning luxury items can be important in the business world, too. Being able to show off a collection of portraits or a range of vintage watches can help you network and forge important connections between major players in your industry. Some luxury goods — like classic cars — can even get you into exclusive events like car shows and celebrity meet-and-greets.
The Drawbacks
Luxury items can help diversify your portfolio and lead to long-term growth in your net value. However, the drawbacks of investing in luxury items are significant and need to be considered before splashing out on a Picasso painting or a Rolex pocket watch.
Liquidity
Stocks and shares are considered liquid assets because they can quickly be converted into cash. You may need to pass a few checks before withdrawing your investment, but the whole process is relatively pain-free.
However, luxury items are illiquid and can undermine your liquid net worth. They are considered illiquid because of the lengthy process that usually accompanies the sale of goods like art and cars. Put simply, if you need to contact Sotheby’s or Christie’s to sell your items, you can expect to wait months, if not years, before converting your goods into cash.
This may not be an issue if you have a strong portfolio and stable income, but changes to living conditions may make illiquid luxury assets into a serious headache. In the worst-case scenario, you have to rush the sale process and will see a major fall in the value of goods as bidders take advantage of your desperation.
Upkeep and Storage
Unlike stocks and shares, you are responsible for the upkeep and maintenance of luxury goods like art pieces and Lamborghini. This can drain your time and money as you will need plenty of excess income to keep the goods in quality condition.
Accounting for upkeep and maintenance costs can be unpredictable, too. For example, let’s say you purchase a Jaguar e-type from the 1960s. As a classic car, the e-type is well known for its quality and smooth ride. However, if you clip a curb on a Sunday drive, you will be hard-pressed to find a new fender or replace the suspension with original parts.
You will also need a secure storage plan in place for any goods you purchase. Buying big-name products puts you at risk of theft, and most luxury goods need rigorous upkeep to maintain their value. Account for these long-term costs when assessing the value of goods, as you will need far more than the initial outlay to preserve your investment.
In addition to these costs, you may need to account for taxes. Some luxury goods — like yachts, cars, and planes — are subject to tax. You need to consult a tax professional before investing and be well acquainted with state law before buying a good you cannot afford to insure, upkeep, or tax.
Buying into the Market
Most people steer clear of luxury goods because they are almost always extremely expensive. The high cost of entry limits your ability to invest in other traditional methods like stocks and shares and can put your portfolio at risk.
Buying into the market is difficult, too. Unless you are a trained collector, you do not know enough about the market to make well-informed bids. Deciding to buy without the oversight of a collector can lead to accidental purchases of counterfeited, fraudulent goods with no value.
The process of purchasing luxury goods is extremely complicated, too. Depending on the goods you buy, you may need access to high-profile auctions like those held by Soethby’s. Entry to sales is usually open to the public, but actually placing bids and purchasing goods can turn into a headache without the right advisors to guide you through the process.
When to Invest
Timing your investment is the key to making the most out of luxury purchases. Misreading the market or buying at a time that does not suit your financial situation can tank your net worth and cause real headaches for you and your family. As always, consult with a financial advisor before purchasing any items.
Investing in luxury goods can be a good strategy during times of high inflation. Luxury goods are largely immune to inflation and price structuring, partly because, as CNBC reports, they are typically bought by consumers with high net worths. This does not guarantee that luxury goods are immune to macroeconomic factors, but they could be a good diversification piece if bought at the right price point.
If you have a well-diversified, stable portfolio, luxury items can be an enjoyable investment that adds to your income. However, buying and selling luxury goods as a hobby should only be considered when you can afford to lose whatever you invest. It is impossible to predict the future of your assets and you may be surprised by news stories that undermine the value of goods like celebrity memorabilia, prints, or antiques.
Luxury goods may be worth avoiding entirely as you enter later life. Some countries have complicated death duties and inheritance taxes, making your golden ring collection a headache for your family. Luxury assets are particularly frustrating if you die without a will, as goods are subject to laws of intestate succession, which typically distribute assets to the closest living relatives in order of priority This will mean that your family has to undergo lengthy court proceedings to determine who receives what if you have not prepared a will or specified who should get which items
What to Invest In
If you decide to proceed with a luxury item investment, you need to have a clear idea of what, exactly, you are after. Ideally, the goods you purchase should make financial sense and should bring you some amount of personal pleasure or prestige. Currently, people are investing in high-end luxury goods like bags, classic cars, whisky, and watches.
A 2023 Knight Frank survey titled “The Wealth Report” found that, despite the economic downturn, investment in art is up. The luxury investment index found that art sales comfortably outperformed inflation and rose by a score of 29%. As a top performer in the luxury goods market, art is among the more stable high-end investments today.
Vintage alcohol like whisky and wine is a hallmark of wealth and luxurious living. However, the Knight Frank report found that high-end whisky may be a solid investment, too. Early adopters to the whisky market enjoyed a 373% return on their long-term investments, and the market appears to be set for a rebound amongst ultra-high-net-worth individuals (UHNW).
When purchasing, you need to be aware of scams and fraud. It’s easy to be fooled, and you cannot expect to see through fakes alone. Instead, work with an expert in the field to assess the veracity of the item that you intend to purchase. Most countries have laws that protect you as a buyer, but these protections may be difficult to enforce and do not guarantee that you’ll have your money returned.
Try to avoid financing luxury goods whenever possible. Saving may take time, but will help you live within your means. A solid saving strategy will help you pay for upkeep and maintenance fees, too, as you will not be in debt when you make your purchase. If you do decide to finance, consider using other items as an asset for collateral appraisals. This keeps luxury items separate from your personal income and expenditures should you default.
Adopting a conservative approach to expenditures can protect you against shifts in the luxury goods market. Whisky, wine, and art may perform well today, but other goods may overtake them in years to come. Buying into speculative markets early can help your investment budget go further and may even lead to high re-sales values in the future.
However, it is impossible to predict which speculative luxury good markets will perform well. As such, you should only buy into a market if you can comfortably afford the “buy-in” price and are willing to lose any money you invest.
Conclusion
Investing in luxury items can be a great way to diversify your portfolio and protect yourself against macroeconomic factors like inflation and stock market fluctuations. Luxury goods like wine and whisky typically grow in value over time, too, meaning you’ll see dividends above the rate typical investments yield. Goods like art and classic cars can be an important networking tool, too, and add real value to your life as you try to build connections.
However, investing in luxury goods should not be made lightly. Luxury items like whisky and portraits are typically reserved for high-net-worth individuals for a reason. They are extremely expensive to insure, typically require high maintenance fees, and can plummet in value due to factors outside your control. Minimize your risk by speaking to a financial advisor before buying a vintage bottle of champagne or a classic car. They will ensure that you are ready to take on the burden of luxury goods and may be able to recommend other investments with higher, more reliable returns.
