Try telling your friends about your portfolio of cheap index funds and watch their eyes glaze over. It doesn’t really make for a riveting conversation, but mention classic cars or a wine investment and watch their ears prick up.
There are lots of articles and blogs on investing out there, but not many touch on things like classic cars or wine.
Most of them talk only about investing cheaply using index funds and that’s great because the rational is simple. The average investor will only earn a return equal to the market average minus fees, which basically means the lower the fees, the higher the return.
Spread you bets!
As far as I know, there aren’t any cheap index funds for classic cars or wine investment, so if your portfolio consists only of index funds it is unlikely to contain any exposure to classic cars.
The thing is, something almost as important as low cost is diversification. Spreading your bets among as many assets as possible is the safest way to preserve your wealth.
Most people usually do this by spreading their stock investments globally and adding bonds as a separate asset class and this is a great well tested method, but there are other assets classes out there.
Wine, jewelry, stamps, violins, art, books and classic cars are all game for investment.
Whether classic cars are a good investment or not can only be answered by looking at some hard data on returns.
The chart below was put together from data in the Credit Suisse Global Investments Returns Yearbook 2018. It shows the annualised real returns for different assets over 117 years.
Source : Credit Suisse Global Investment Returns Yearbook 2018: Summary Edition
I don’t think many people will be surprised to find that stocks give the best returns, but I’m not so sure that they would have guessed that classic cars come a close second.
For those readers asking, “are classic cars a good investment,” the answer is a resounding yes. They’ve increased annually by 4.8%, not that far off stocks.
And it certainly came as a surprise to me that violins, stamps, jewelry, wine and classic cars all performed better than global bonds and what about the poor returns from housing?
Don’t sell the house just yet!
Don’t sell the house just yet, because this figure doesn’t include the money you would make from letting a property out and neither does it account for the fact that banks will lend you a lot of money to buy a house, which means you can increase your wealth faster.
If you use a £400,000 mortgage to buy a £500,000 house you only need to put down £100,000 of your own money. If the house price goes up 20% it is then worth £600,000, which gives you £200,000 in equity. In essence you will have doubled your original £100,000.
(That said, if you were particularly unlucky this story could happen in reverse and you could double your losses, so be aware of the risks!)
Added costs
On paper investing in alternative assets like classic cars looks like a winner, but there are things to think about.
The data for collectables is likely to be based only on the really high-end items, which as you can imagine are likely to be very expensive.
You can buy shares for pounds. The same can’t be said for classic cars. Even a single case of wine is likely to set you back thousands of pounds. The cheaper stuff just isn’t as likely to get the good returns.
You then need to think about storage. All these assets are going to need storage of some kind which will add to your costs, particularly classic cars which at the very least are going to require a garage.
Unless you’ve got the latest state of the art security system and a couple of dobermans you’re probably going to need to spend some money on insurance.
Even people who know what they are doing are likely to need some help when buying alternative assets. It would be hard to buy something special without a dealer getting involved and dealer commissions are going to be a lot higher than you pay when buying stocks and bonds.
And where there is money involved there are unscrupulous people. Alternative assets have a bad reputation for attracting unsavory characters, that are out to cheat investors.
Most of these assets will have their fare share of people ready to take advantage of the inexperienced, whether that be through crazily high fees or in extreme cases through fakes.
I’m sure a classic Ferrari won’t be the easiest thing to fake, but the same can’t be said for the associated paperwork.
The bottom line
All that said, alternative assets like classic cars definitely have a place in some portfolios. In particular, I think they would suit two kinds of investors. Those with a high net worth, and those with a true passion for one of these assets.
The high net worth individual can afford to loose a little money if prices plummet and those with a true passion for something are more likely to get knowledgeable about their subject and then make better investment decisions, and at the same time have fun in the process no matter whether they actually end up making money.