The aesthetic allure of collectibles like artwork, fine wines and classic cars can be hard to resist, especially when compared to more traditional investments. For high or ultra-high net worth investors, the ability to combine the pursuit of potential growth with their personal passions or hobbies holds a lot of appeal. Collectibles are also attractive to investors looking to diversify their portfolios or hedge against inflation.

However, collectibles come with some unique risks. For those looking to diversify, there may be better options. And those who think they can invest in collectibles the same way they invest in stocks or bonds may encounter some unexpected challenges.

Best practices for collectibles

Here are some best practices for those interested in or currently holding significant collectible assets:

Consider Alternative Asset Classes for Diversification Purposes

“The significant carrying costs and volatility of collectible investments can undercut their effectiveness as a diversifier,” according to Terry Sylvester Charron, Family Wealth Investment Advisor at BNY Mellon Wealth Management. “Investors seeking diversification might be better served by exploring financial alternative asset classes, such as managed futures, commodities or absolute return strategies, which also have low correlations to traditional investments but aren’t as cumbersome.”

Buy What You Like and Hope for the Best

From a financial safety perspective, it’s generally best to view collectibles more as a hobby than as a way to make money. While they can grow in value over time, there are costs beyond purchase, storage and care, such as auction or broker fees. In essence, any potential monetary gains from collectibles are best viewed as a fringe benefit, a bonus that serves as a validation of the collector’s keen eye and good taste.

Keep a Detailed Inventory of Your Collectibles

“Collectors should absolutely have an inventory or catalog that captures important details about their collectibles,” says Jere Doyle, Senior Vice President and Estate Planning Specialist at BNY Mellon Wealth Management. “It should include where and from whom they bought them, for how much and any other distinguishing features of the item.” Doyle says that provenance, a clear record of the history of ownership, is critically important when dealing in collectibles, and can significantly impact the value of the item as well as the collector’s ability to sell it.

Preserve the Value of Your Collection

Even if your primary motivation for building a collection is personal enjoyment, consider taking steps to preserve and safeguard your collectibles so you can capitalize on them in the event that they do increase in value. This could include purchasing specialized insurance, having your items appraised by a certified expert and making accommodations for proper, long-term storage, whether in your home or in a professional storage facility. 

Don’t Forget Your Collection When Planning

“People often don’t disclose their collections unless you specifically ask them,” says Doyle. “They don’t see it as an asset — they just see it as something that they do for pleasure.” Failing to take collections into account when making decisions about your wealth and estate plans can have serious financial consequences. It’s important to recognize and account for their value as you would any other financial asset.

Consider Donating Your Collection

Donating valuable collectibles to a charitable organization is a great way to support a cause you care about and take advantage of a significant tax deduction. Additionally, gifting an entire collection to a charity or other nonprofit can help to avoid potential liquidity issues around the estate tax and create a lasting legacy for your life’s passion. Some collectibles, like art, classic cars or sports memorabilia, have exhibition value that might make them good candidates for donation to a museum. “For many collectors, there’s a desire to see the collection kept in one piece even after they pass it on,” says Doyle. “That’s something that should be discussed with the museum or charity prior to the transfer.” He recommends that donors draft a gift agreement with the recipients to ensure that the donation is put to use in a way that entitles them to the tax deduction and best reflects their wishes. He also notes that collectors could form their own private operating foundations in order to retain some controlover their collection while still enjoying the tax benefits of donating to a charity.¹

Don’t Overlook the True Value of Collectibles

There’s a less obvious risk in approaching collectibles from an investment perspective — the possibility of missing out on the other, more abstract benefits they provide. Collecting offers the chance to indulge your curiosity by exploring something new and unfamiliar. It can connect you with people from different walks of life through a common interest, helping to form vibrant friendships. It can help to enrich your community, not just financially but intellectually and culturally. Though it would be unwise to ignore the financial aspects of collecting, these other benefits should not be overlooked. Over time, they may be more rewarding to you than the possible financial gain.