Tangible Assets: The Other Hedge Investments
Hedge investments come in all shapes and sizes - literally and figuratively.
Lots of folks want to grow their money outside of the financial system. Popular ways to do this include buying bitcoin, precious metals and other commodities. But there’s another, more obscure hedge out there. It can protect you from market risk while delivering substantial returns.
Hard tangible assets are physical investments with aesthetic or collectible value. They include prized wines, rare stamps, fine art and antiques, and other unique items. Maybe you’re not personally interested in collecting these things. But judging by the thriving market for collectibles, lots of people are.
This graph from our colleagues at Stanley Gibbons shows the growth potential of tangible assets. (We should mention that Stanley Gibbons is a Pillar One advisor with The Oxford Club. Learn more about the benefits of Club Membership here.) These unique hedges could make useful additions to your portfolio. Let’s explore a few of them.
Certain vintages from certain regions are just too valuable to drink.
People have been collecting premium wines for as long as wine has existed. But the modern investment wine market is a relatively new phenomenon that emerged in the 1970s.
Investment-grade wine generally comes from a handful of premium producers in Bordeaux. A bottle from the right vineyard and the right year may be worth thousands of dollars. And they can appreciate a lot over time. A buyer of certain Pomerol or Pauillac wines could have tripled their money in the last decade.
But investment wine has some drawbacks. In many states, wine trading is considered unlicensed sale of alcohol. There are exceptions for selling investment wines in auction houses, but they often charge a commission. Wine fraud is also a pertinent concern for investors. If you’re interested in investment wine, make sure you know your stuff.
Two years ago, a rare black and magenta stamp from British Guiana was sold at an auction for $9.48 million. The original retail price? One penny.
This writer doesn’t understand the personal appeal of stamp collecting. But the financial appeal is hard to miss. For more than two decades, Stanley Gibbons has curated an index of 200 rare Chinese stamps. It’s averaged 11.6% annual returns over the past 23 years.
According to The Wall Street Journal, there are about 60 million philatelists globally. So even if you couldn’t care less about stamps, someone else does care. And that someone might be willing to pay you an insane amount of money for the right one.
Once again, the stamp market is not risk-free. Forgery is a persistent issue among stamp enthusiasts. So if you’re not a philatelist yourself, make sure you consult one before buying anything.
We all know some guy who maintains an old car in his garage. Some enthusiasts do this work for fun or sentimental value. But others do it to grow their nest eggs.
Many classic cars have seen their resale values increase fivefold in the last decade. The internet has caused an explosion of activity in the classic car market. Once-isolated groups of car nuts have joined together to swap information - and rides.
Granted, not every old car is worth a lot of money. The investment car market tends to favor European coups and sedans from the ‘50s and ‘60s. And collectors can have strong preferences about condition and mileage.
One obvious disadvantage of this asset is the high overhead. Buying into the classic car market will probably cost you at least $20,000. And just like in the stock market, there are good purchases and bad purchases. Unless you’re rich enough to diversify your car portfolio across several classic models, this can be a risky market.
Each of these tangible assets has unique advantages and unique risks. But there’s another problem with collectibles that you should know.
Tangible assets are excellent hedges against small-scale or short-term market volatility. But they’re not necessarily safe from major economic downturns. Ultimately, the demand for these items doesn’t come from investors. It comes from hobbyists who collect them for entertainment, rather than financial gain.
During hard times, people tend to cut their entertainment spending. So recessions can hit tangible asset markets just like stock markets.
However, these markets operate completely outside the purview of major financial systems. They do respond to large-scale economic changes. But they’re unaffected by day-to-day speculation on Wall Street. In a time of rising uncertainty and soaring volatility in financial markets, you should consider putting aside some money for these quirky hedge investments.
For all you know, that $0.05 stamp you bought the other day could be worth $10 million in your grandchild’s lifetime.
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