As investors search for alternative investments that look more attractive than low-yielding bonds or expensive equities, interest in collectibles (art, wine, classic cars) has gathered momentum. Some collectors luck into windfalls, and if you believe collectible indexes the annualized returns leave normal asset classes in the dust. But once you dig into the details, it’s hard to justify collectibles as anything more than an expensive hobby with the occasional upside.

“It is easy to understand the superficial appeal of investing in collectables, either directly or through some sort of pooled funds,” says a recent white paper from Barnett Ravenscroft Wealth Management. “However, it is important to get behind the headlines of the money pages of the Sunday papers and kick the tyres on these investment opportunities a bit harder.”

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Collectibles have a negative future cash flow

The first thing to note about collectibles is that they have a negative expected cash flow: like gold, they don’t produce anything, but you have to pay for storage and insurance. Your investment can only work out if demand pushes the price up faster than storage costs, insurance, and inflation combined.

Transaction costs, not included in the double-digit returns that are so often cited, are also a major problem for investors. If you want to sell an expensive painting, for example, you may have to pay 20% – 25% of the sale price to the auction house or broker. Collectible investment funds, like other hedge funds, typically have a 2/20 fee structure, but they are also much less liquid and five-year lock-ups aren’t out of the question.

Add in the higher potential for fraud since collectibles aren’t regulated in the same way as stocks and bonds, and there is a lot to dissuade investors before we even address price movements.

Collectible prices demand-driven and difficult to estimate

Clearly, collectibles prices are demand driven and a change in taste can cause a particular piece to plummet in value. The BRWM paper illustrates the danger with the example of Van Gogh’s ‘Portrait of Dr Gachet’, sold in 1990 for $82.5 million and eventually resold for about an eighth of that price. Van Gogh’s work is still highly sought, but his various works aren’t fungible and there isn’t much data on any one painting. Determining a fair price involves a lot of estimation, and if no one else reaches the same conclusions when you need to sell you could be forced to take heavy losses.