Passion investing can be remunerative, too

You may know individuals who collect coins and stamps. Some have expensive tastes too, they collect rare arts and antique furniture. We are, of course, not talking merely about hobbies here. Such passion, if you have one, can form part of your investment portfolio! In this article, we discuss passion investing and show why you could, if your lifestyle permits, engage in such investing. We also bring to the fore the issues associated with such investing.

benefits

There are two reasons why you should look beyond typical investments such as stocks, bonds and commodities. One, research on traditional assets will expand, as the market becomes more institutionalised. And that could, in turn, lead to better price efficiency and lower returns in the future. And two, there is the diversification issue.

As the sub-prime crisis in 2008 confirmed, traditional assets move together during global crisis, thus, exposing the portfolio to high risk. While passion investing is not entirely immune to losing value during global crisis, such assets do not move in lock-step with traditional investments and, thus, provide better diversification benefits.

As the name suggests, passion investing refers to investing in physical assets that you are passionate about. Such assets include arts, antiques, and rare coins. There are some advantages in investing in such assets. For one, you enjoy the pride of ownership. Take antiques. Unlike stocks and bonds, which are primarily in electronic form, you can display antiques in your house. You can derive satisfaction possessing them and displaying your ownership to others. For another, because these are rare, their value also increases with age. You can, therefore, derive two-fold benefit, invest in assets that can provide higher returns and enjoy their ownership during the holding period!

There are, however, certain factors that you need to consider before investing in such assets.

risks

Passion investing comes with some unique risks. You should be careful about the title of the asset. Take paintings. You may buy art from a dealer. But what if the painting was stolen from its previous owner? Your purchase is illegal and you will have to return the painting to its original owner. Recovering the amount that you paid to the dealer is quite another thing!

Then, there is the physical risk. Take rare coins and arts. You have to protect such assets from direct sunlight and moisture. Otherwise, they may discolour. And any damage to the asset could substantially reduce its value.

Secondary market

Finally, unlike stocks and bonds, antiques do not have an active secondary market. That is, you cannot easily sell the product for two reasons. One, you do not know the potential buyer and search costs are high. And two, the price of the asset is not easily visible. This makes passion investing illiquid.

Of course, these risks should not deter you from investing in passion assets.

You can moderate these risks. For one, you can insist on a certificate of authentication before you buy an antique such as art or coin. For another, you can store such assets in safe places to prevent damage, using dehumidifier to store arts and coins, for instance. Or you can buy passion assets that do not require such extensive care, antique furniture, for instance.

Conclusion

Passion investing provides you “pride of ownership” and also offers scope for high returns. You should, however, take care to invest primarily in rare assets. Buying a costly 25-foot yacht is not passion investing! Such purchases are merely luxury goods. You can allocate between 5 and 10 per cent of your total portfolio towards passion investing. We suggest that you start small, given the risks associated with such investment. Passion investing forms part of aspiration assets in our Wealth Mapping framework.

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