There is a large but very illiquid asset class that falls under the broad category of passion investments. A passion investment can be anything from fine watches and jewellery, classic cars, art, wine, comic books to trading cards. The whole five minutes spent on the topic during my academic studies essentially amounted to a warning to stay from them. Yet many people have experienced great returns in this asset class. In my opinion it is a very personal choice if investing in passion assets is a good or bad financial decision.
I think the main difference stems from asking yourself the following question. Are you personally passionate about what you are considering investing in or are you considering investing in it because you know other people are passionate about it? While this doesn’t seem to make a big difference at first, it can mean the difference between a profitable or losing investment.
The main reason is that due to their illiquidity and rarity, it is extremely difficult to put a fair value onto passion investments. This gets compounded if you don’t have the same specialist knowledge of the sector as the person on the other side of the trade. It is very difficult to obtain that knowledge if it is not a true passion of yours.
The caveat here can be that too much passion sometimes clouds your judgement. That classic car you have dreamed about since childhood may sway you to buy it at a price that does not reflect good value. Of course a great upside of that kind of scenario is that you may end up stuck holding onto something that you truly love. In that sense a hobby expenditure becomes the result of a passion investment gone wrong.
On the other hand, I would avoid passion investment funds like the plague. Even though according to the Coutts Passion Index the asset class has outperformed shares in the last decade, a run on a fund invested in passion assets could result in a disaster of epic proportions. By the very nature of the fact that a lot of the value is derived from the passions of people interested in them, liquidating a portfolio of watches, cars, or comic books in any timely manner would be near impossible without a nasty fire sale write down.
Further on the issues surrounding the illiquidity of this asset class, I would strictly limit the percentage of your net worth tied up in passion investments to about 10 percent. If your business is closely related to passion investments and it is your main expertize then this number could be slightly higher, but even then you should separate your personal net worth from the success or failure of your business. This is practical advice regardless of the industry.
Passion investing attracts many people due to the fact that it can be a lot more fun than probably any other form of investing. They are also a lot more fun to show your friends than a statement from your broker showing which shares or funds you hold. The downside is that they are illiquid, and if you are a novice you will surely get taken advantage of by the many sharks in the game. However, if you truly have a passion for some of these goods and know your stuff, the returns can occasionally be very good.
David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
