Investors have always loved status symbols – after all, what’s the point in making your millions if you’re not going to spend some of them on a luxury sports car or holiday home?
But there are some alternative investments that can work not only as status symbols but also as a means of generating future capital gains.
These best-of-both luxury goods allow you to buy something tangible that you can hold, look at and admire while using it as a store of value to sell off at a later date.
If you’ve only ever invested in stocks, shares, and funds, it might be worth considering whether you could put a sensible percentage of your portfolio into physical luxury goods.
You might find renewed motivation for investing in a category you’re interested in, for example, fine wines or a specific style of artwork.
Here are some of the things to consider when adding luxury goods to an investment portfolio – and how to avoid overspending by buying with your heart instead of your head.
How to make money from luxury goods
First of all, it’s worth taking a moment to appreciate where the returns come from when you add luxury goods to an investment portfolio.
If you buy goods directly, there’s no dividends or interest earned, and there may be storage and maintenance costs – especially on an item like a sports car that will need regular MOT tests and possible repair work.
But if you choose high-value goods that become more desirable over time, you can make substantial capital gains when you sell them off, so there’s still plenty of money to be made.
As always, factor in all of the expected costs when making your calculations, including transaction fees, auctioneers’ commission and so on.
However, if you’re going to get some enjoyment from the items you buy – for example, if it’s artwork you can hang on the wall or a car you can drive without significantly harming its value – you might want to put a personal price on this too and accept that it could still be a worthwhile purchase, even if the capital gains are lower in the end.
What luxury goods can I invest in?
If it’s desirable and expensive, you might want to consider investing in it. Just be aware of which categories of luxury goods are likely to gain value and which will depreciate over time.
Some examples of luxury goods to invest in are:
- Artworks (e.g. paintings, sculptures)
- Collectibles (e.g. coins or stamps)
- Designer watches
- Fine wine (e.g. vintage wine and champagne)
- Sports cars
- Vintage cars
A certain amount of knowledge is needed if you’re going to invest successfully in any category of luxury goods, so do your research. If you’re buying art, jewellery or collectibles there may be a collector’s price guide available to help you decide.
Beware of mass-market ‘collectibles’ that have very little real-world value. These are often designed for purchase by individuals who will ascribe sentimental value to the product, but have no desirability on the resale market.
You should also be prepared to hold on to your purchases for a relatively long period of time. As you are relying solely on capital gains, you need to give the item time to rise in value or demand, or to decrease in availability.
Again, factor this into your purchase decisions, as you will need the capital gains to outpace the rate of inflation and real-terms rises in the cost of living, if the item is to add true value to your portfolio.
The size of the luxury goods market
The luxury goods market is one that spans institutional and individual investment as well as personal purchases by households.
Whereas investors may hold a substantial portfolio, there are many millions of households worldwide that invest in individual heirloom items of art or jewellery, which helps to increase the total market size and resale opportunities.
Statista forecasts that in 2020 the size of the worldwide luxury goods market will be over $330 billion, up 3.9% year-on-year.
The analyst also predicts continued growth until at least 2023 at a compound annual growth rate of 2.7%. On average worldwide, each person on the planet will spend $44.50 on luxury goods in 2020, up 2.9% on last year.
Although that might not sound like much, it’s averaged over the entire global population and highlights how relatively small spending by individual collectors contributes towards a market size in the hundreds of billions of dollars worldwide.
Where is the luxury goods market?
Depending on where you are in the world, the local luxury goods market can look quite different.
Statista’s report shows that the greatest revenues are generated in the US at over $63 billion in 2020, while the largest segment globally is luxury fashion with sales of $116 billion this year.
But cultural differences can play a big part too, for example in Asian countries where jewellery and other precious metals are frequently given in large quantities as gifts, driving demand higher.
Some economies in the eastern hemisphere are also among the fastest-growing, adding to households’ disposable wealth and leading more families to look to luxury goods like jewellery and other status symbols as a store of value for that excess income.
Understand where the healthiest market can be found for the items you are interested in investing in – and when you stand to make capital gains by moving luxury goods from one part of the world to another, factoring in any transport costs and import duties.
Focus on luxury goods with enduring appeal, as these are more likely to hold and increase their value, as well as finding a buyer at the appropriate market price at any given point in the future.
Like any ordinary stocks and shares, the need to find a buyer impacts on the liquidity of your portfolio. In the case of luxury items, disposing of your portfolio more quickly can mean accepting below-market value, so try to plan ahead before liquidating any such assets.
In addition, tastes change. An artist who is in vogue one year could be all but forgotten 12 months later, while another could shoot up in value if they start to win awards or in the event of their death, which is the ultimate cap on supply.
However, there is plenty of past performance data for different categories of luxury goods, so you can study this and see what sells enduringly well either via private sale, specialist dealer or auctioneer, and adjust your risk exposure accordingly.
Categories of luxury goods
Because the various categories of luxury goods are so different, it’s crucial to approach each segment within the market in its own right.
If investing in art, decide where to buy. Do you want to put your faith in a local art dealer whose expertise is greater than your own? Support an artist whose work really inspires you? Or buy older pieces at auction by known artists, even if the purchase price is higher?
Most artists never get their big break, but even so, if you find someone whose work moves you, you might want to buy a few small pieces. Even if they don’t rise in value over the years, you could still get a lot of enjoyment out of owning them.
Luxury cars range from modern sports cars and supercars to classic models and vintage cars. Bear in mind that most brand new cars lose a large percentage of their value as soon as they roll off the production line.
Older cars can give you more confidence in their value, and demand for desirable models tends to grow over time, while supply dwindles as more are scrapped or enter private collections where they will not be resold for many years.
If you’re a motoring enthusiast, you could even consider buying a non-runner classic car and restoring it faithfully – the finished vehicle could have a much higher resale value, especially if you can source original replacement parts from luxury scrap dealers.
Fine wines, desirable vineyards and vintage years all combine to give some bottles of wine and champagne eye-wateringly high prices, with growth rates reaching into the several hundreds of percent at the top end of the market.
To maximise the resale value of your wine investments, you’ll need to make sure they are stored correctly. Unless you have a climate-controlled wine cellar of your own, consider using a third-party wine storage service. Make sure you get documents that prove your wine has been stored under optimum conditions, so you have the provenance to support future resale prices – and get it insured in case the bottle is damaged in transit.
Final thoughts on luxury goods investment
Investing in physical goods always carries some risk, so think in advance about transport, storage, handling, and insurance – including how much it will all cost and its impact on the future value of your investments.
An alternative to investing in tangible luxury goods is to put your money into a luxury goods investment fund and allow the fund manager to buy goods on your behalf. There may be management fees but you usually won’t bear any of the responsibility for the storage, shipping and so on.
Finally, there are tracker funds and ETFs that follow the performance of a broad index, segment or market. Invest in one that tracks luxury goods and you can tap into the average growth rate of a basket of high-demand, high-desire goods without any of the cost or inconvenience of taking delivery of the items themselves.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.