When we talk about different types of investments we are usually referring to things like stocks, bonds, mutual funds, and real estate. These are the traditional assets that make up a typical investor’s portfolio.
But there are alternative investments out there too, and more and more people are turning their back on the traditional stock portfolio in favor of collectible items including things like Lego, stamps, rare coins, or Star Wars action figures. This article about investing in Lego got me thinking about the profit potential of investing in collectibles, as well as the challenges involved.
If you choose a line of products that interests you it can be quite fun to watch your collection grow. And no matter what happens to the market price you will always have a physical item in your possession.
Of course the primary reason people invest in collectibles is the potential for profit. One person’s toy is another’s prized possession and you’d be shocked at the prices fetched by collector’s items that are discontinued and hard to find.
Not long ago we had a few friends over for a housewarming party and one little boy named Jack fell in love with my daughter’s stuffed Oswald the Octopus doll. We had bought it for her when she was a baby and she’s now eight and a half.
Jack’s birthday is coming up so we thought it would be nice if we could get him the same Oswald plush doll but after a quick Google search we realized it was no longer available in stores.
Undeterred we hopped on eBay to search for a gently used Oswald, and we were surprised to see our big, blue friend selling for up to $200!
I don’t remember exactly what we paid for Oswald all those years ago but I would guess around $15. That means in about seven years the market price skyrocketed over 1,300 percent!
This just goes to show that alternative investments like these can generate profits that far surpass the stock market. Just imagine you had bought a hundred Oswald plush dolls in 2005 and stored them away until today. Your $1,500 investment would be worth around $20,000 today!
Not So Fast
Now I’m certainly not telling you to unload all your stocks and buy Lego sets and Lord of the Rings action figures instead. There are a number of things you need to consider before you start investing in collectibles.
You Have to Store It
The more your collection of action figures, matchbox cars, or baseball cards grows the more space you will need to store it. You might start out with a few boxes or bins tucked away in the spare closet, but before long it will spread into the basement, garage, or attic. Some people let their collections get so large they have to keep it in a storage unit and pay a monthly fee. Those storage costs will take a serious bite out of your profits.
Fire, Water, and Theft…Oh My!
A tree branch falls through your roof and snow ruins your 1952 Mickey Mantle rookie card. Your washing machine’s water lines rupture and your basement full of mint condition Boba Fett and Optimus Prime toys is flooded. Someone breaks into your garage and steals your collection of rare comic books. The storage unit where your $50,000 Lego collection is stored burns to the ground.
Bad things like these happen and when you have valuable collectibles stored away there is always a concern that one unlucky break could completely wipe you out. Depending on the size and value of your collection you may need to take out a separate insurance policy to protect it. Of course, that is another expense that will eat into your profit margins.
When you buy and sell stocks you pay trading fees. The same is true of collectible items. Let’s say you buy movie prop, like maybe an Orc helmet that was worn in the Lord of the Rings trilogy, and you later sell it at a 50 percent profit. If you bought it through eBay you know they took a cut of your profits. And Paypal would have taken out their cut too (on both the buying and selling transactions) and there were probably shipping fees involved too. These expenses are a legitimate cost of doing business, but if you are working on razor thin margins these fees can be the difference between a profit and a loss.
One of the reasons Lego sets are popular with collectors is scarcity. Each set is only manufactured for a limited time and in limited quantities. Once they stop producing a set the value starts to increase as it becomes harder and harder to find a mint condition set. Of course, if The Lego Group changed their policy and started making more and more of the most popular sets, the market would become saturated and they would lose their collectability.
Here’s another example of scarcity and market saturation…
When I was just a kid in the 1980’s I collected baseball cards. It was mostly for fun as my friends and I would walk to the corner store together to spend our allowance on baseball card packs and then tear into them on the way home hoping for another Darryl Strawberry or Jose Canseco card to rub in each other’s faces.
After a few years I had a pretty good sized collection. It was still mostly for fun but I would buy the monthly Beckett magazine to see how much my cards were worth and I had visions of building a massive collection that would be worth a fortune!
Of course there was a million other kids thinking the same thing and the baseball card companies jumped all over the opportunity to supply us with all the cards we could ever need. New companies popped up releasing all new sets of cards. There were all sorts of limited edition and special edition sets and it seemed like each card company had five or six sets of their own.
As I learned the hard way, the collectible market is all about supply and demand. The reason baseball cards had become so valuable in the first place was because mint cards were so hard to find. For years, older cards had been put in bicycle spikes or tossed in the trash by mothers who got tired of tripping over them.
The lucky few who kept their cards in perfect condition saw their values skyrocket. But as more and more people began collecting baseball cards as investments instead of for fun, the market became saturated and collapsed.
Lack of Diversification
Smart investors know they should diversify their investments to spread the risk and protect themselves in case the one type of asset sees its value drastically reduced. Just look at the people who had their entire portfolio invested in Enron stock thinking the company was too big to fail. When the company went under they lost everything. A lifetime of savings was gone in the blink of an eye.
The same thing could happen if you invest all of your money in collectibles. Just imagine the market for Lego sets collapses and your $50,000 collection drops to only $500 in value. Is that a risk you are ready to take?
A Final Word
This article is not meant to scare you or steer you away from investing in collectible items. Having a tangible asset in hand can give some peace of mind to investors. But you need to be careful to not let yourself get carried away and rest your entire financial future on your collection.
Investing in collectibles can be a fun way to make extra money and diversify your investments. Just be sure to use moderation and think of your collectibles as just one part of your overall portfolio.