This article was originally published in FA Magazine July 1, 2022
When the stock market goes down, people look for additional investment ideas. Everyone wants to discover the next big thing or an old idea that has been overlooked. You have heard the expression: “All that glitters is not gold.” Some ideas sound great, yet it’s important to understand the drawbacks.
1. Owning rental property. There are many reasons in favor of this idea. People will always need someplace to live. Rents can rise with inflation when leases are renewed. In simple terms, the annual rental income divided by the purchase price of the property can look better than many fixed income instruments.
You need to understand: You are a landlord. You have responsibilities to your tenant to maintain the property. This can be outsourced to a property management company, but that costs money. If a tenant leaves, the property sits vacant until it is re-rented. You still need to pay your mortgage, insurance and property taxes. Sometimes tenants stop paying rent and you need to go to court.
2. Buying diamonds and precious stones. This sounds like a good idea if you watch lots of crime dramas on TV. The thieves often steal diamonds, rubies and emeralds. They are expensive when you shop in jewelry stores. They are an “investment” you can wear and enjoy, then perhaps sell in the future.
You need to understand: The markup on diamonds can be high. According to Chron, when a diamond is sold to a customer by a retail jeweler, the markup is 1.6 to 3X the original cost. Quality and size are key determining factors in a diamond’s value. Put another way, you need to try to buy the best.
3. Buying a timeshare. The logic is you “own property” without the headaches of “owning property.” This might sound attractive if you consider buying into a hotel room in Manhattan or a beach resort in a great location. You think about renting it out when you are not using it.
You need to understand: The secondary market is not what you would expect. Put another way, they can be hard to sell. In the meantime, you are responsible for annual maintenance fees set by the timeshare operator. These can go up over time. You often discover the carrying costs for your timeshare can be similar to the cost of renting a hotel room in the same location for the same time period.
4. Buying original art. Few of us understand art. I do not. When you look at contemporary art setting record-breaking auction prices you often think: “How tough could it be to invest in art?” As with many things in life, there is a small subset of collectible art and a large amount of art that is not collectible.
You need to understand: Works by the really great artists who are in demand are sold through dealers representing the artists or auction houses selling consigned items. There are few “entry level” pieces. Most are very, very expensive. The BBC produced an excellent documentary that is also entertaining, “The Banker’s Guide to Art.” It’s available on YouTube.
5. Flipping houses. You see programs about it on TV all the time. It seems so easy. You buy the worst house on the best block. You fix it up quickly and sell it for a big profit. Why isn’t everyone doing it?
You need to understand: The investor needs to buy the right house at a very low price and get the renovation work done within a tight budget. On some programs like the BBC’s “Homes under the Hammer,” the buyer often has a crew or workers or a very large family that can get the work done quickly while keeping costs down. You are paying the carrying costs (mortgage, insurance and property taxes) from the time you buy the property until it is sold.
6. Buying wine as an investment. There are indexes tracking the fine wine market. The numbers are impressive. The most collectible wines have appreciated in the past. A major reason is because they are in short supply. Why not walk down to your local wine store, buy a few bottles, and resell them later?
You need to understand: Like fine art, there is a small universe of collectible wines that do well at auction. They are usually on allocation, meaning they are hard to get. They need to be properly stored and eventually sent to auction. Unlike total return stocks, they don’t pay dividends while you are waiting. I recently wrote an article for Barrons on the subject.
7. Buying antiques. Have you been watching Antiques Roadshow? Someone buys a painting at a yard sale for $50 and discovers it is worth $1,500. Should I be checking out local yard sales?
You need to understand: Buying at yard sales and flea markets can be a rewarding hobby, but it’s highly unlikely you will get any great finds that are drastically underpriced. Here is why: Thanks to Antiques Roadshow and the Internet, everyone has the ability to research their goods online. If they are lazy, they might take it to their local auction house on appraisal day. If they missed out on both those opportunities, another dealer would likely have bought it before you got there. Finally, don’t forget what else the proud owner said on Antiques Roadshow: They bought the painting for $50 at a yard sale in 1972! They held it for fifty years! Now it’s worth something.
8. Buying precious metals. There is a good argument for buying gold and silver. These are metals that have industrial uses in addition to their use in the jewelry trade. Like gemstones, you can enjoy your gold jewelry, then perhaps sell it in the future.
What you need to understand: You can probably help in this area. The markup on jewelry can be high. Put another way, the purchase price of that piece of gold jewelry is higher than the value of the metal. Your client can probably buy gold in bullion form, not take delivery and hold it in their portfolio. They might be able to buy a listed security that trades similarly to an ounce of gold or silver.
9. Restoring classic cars. You hear about classic car auctions. You imagine the thrill of riding around in a car that turns heads.
What you need to understand: Except for some very rare and collectible cars, restoring a classic car is a labor of love. When you factor in the value of the owner’s time and the cost or replacement parts, the owner might sell the car for more than they paid, but they likely have not made a profit.
10. Buying foreign debt. Interest rates are not the same everywhere. Your client might see bonds offering high yields overseas. They want some for their portfolio.
What you need to understand: You can help, but they need to understand the risks. Bonds usually carry safety ratings. Accounting standards are not the same everywhere in the world. There is also the currency conversion risk.
Your client might be looking at something they consider an attractive, alternative investment. One of the ways advisors add value is trying to help clients go into situations with their eyes open, understanding the risks.
Disclosure: Information contained in the materials included are believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of this information. This document is provided for informational purposes only and should not be construed as individual investment advice.
Bryce Sanders is the president of Perceptive Business Solutions Inc.. Dunham & Associates Investment Counsel, Inc. and Perceptive Business Solutions Inc. are not affiliated companies.
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