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A 2018 to Do List for Alternative Asset Investors

A 2018 to Do List for Alternative Asset Investors

As 2017 departs and 2018 arrives, it makes sense for those interested in alternative assets to reassess their financial situation and make these smart moves.  So here is the Antique Sage’s 2018 to do list for alternative asset investors:

 

Rebalance your portfolio from conventional assets to alternative assets

The paper asset markets have had a tremendous bull market run over the past 9 years.  So there is every probability that the stocks, bonds and mutual funds in your retirement or brokerage account are worth far more than they were just a few short years ago.

So now is the perfect time for you to take a little of your winnings off the table.  Sell some of your stocks and bonds and reallocate the proceeds into an asset class that hasn’t performed as well.  Of course, there are very few asset classes that haven’t performed well recently.

But there is one asset class that was completely overlooked in 2017: bullion, fine art and antiques have lagged substantially behind.  In my opinion, this makes them perfect for alternative asset investors in 2018.  Their prices are low and their valuations are reasonable.  A move from traditional paper assets like stocks and bonds into fine art and antiques would simultaneously de-risk your portfolio while improving future return potential.

 

Don’t buy into the crypto-currency hype

Alternative asset investors may be sorely tempting to throw their money at those alternative asset niches that have done the best in 2017.  In this case, I’m referring to the crypto-currency complex.

Most crypto-currencies, including such illustrious participants as Bitcoin, Ethereum, Litecoin and Ripple, absolutely skyrocketed during 2017.  Bitcoin went from about $1,000 to $14,300 for an astounding 1,330% one year return.  However, Bitcoin was far from the best crypto-currency performer of 2017.  Ethereum rose by 7,470%, Litecoin increased by 5,775% and Ripple soared by an unbelievable 33,186%.

Now, I like the idea of crypto-currencies.  The world very much needs a form of money that is beyond the self-serving manipulations of corrupt central banks.  But Bitcoin, along with nearly every other crypto-currency currently in existence, has some pretty glaring flaws.

In short, it might be tempting for alternative asset investors to shift the entirety of their alternative asset allocation into crypto-currencies, especially in light of their recent outperformance.  But they should resist that urge.  Investment returns come in cycles.  Assets that perform well for an extended period of time inevitably underperform at some point in the future – usually when you can least afford it.

 

Buy yourself a wonderful piece of fine art

Life always seems to move faster than we would like it to.  There are always appointments to make, chores to finish and bills to pay.  But it is vitally important to step back and appreciate the world every once in a while.

A perfect way to do this is to buy a piece of beautiful art.  It could be a colorful print to display over your couch, or an avant-garde sculpture for your coffee table.  It could even be a fine piece of antique jewelry for you (or your spouse).  Almost anything that has been crafted by human hands with the primary intention of being aesthetically pleasing can qualify as art.

The only rule is that it should be a piece of art that appeals to you.  This might seem self-evident, but a surprising number of alternative asset investors get caught up in the idea of appreciation potential above all else.

Don’t fall into this trap.  Instead, buy a stunning piece of art just because it speaks to you.  If you are lucky, that artwork will not only give you countless hours of viewing enjoyment, but also a reasonable investment return as well.

 

Make sure you have enough cash or other short-term investments on hand

With the stellar run that both the stock and bond markets have experienced over the last several years, it is easy to believe that the good times will last forever.  And it is true that securities markets may continue to rise at a rapid clip for a while to come.  But the fortunes of the stock market can change with shocking abruptness.

Therefore, it is wise to reassess your financial position and make sure that you have sufficient cash on hand to weather an unexpected market disruption.  It is even more imperative for alternative asset investors – those who collect notoriously illiquid assets like fine art and antiques – to have a healthy cash buffer.

Having a large pile of cash or other short-term investments will help you fight the urge to sell less liquid investments at inopportune times.  This might not seem terribly important right now, when every asset known to man is rising without pause.  But having sufficient cash holdings will become vital if there is ever a market downturn.  It is good to be able to sleep soundly at night without having to worry about financial Armageddon.

The Top 6 Art Investment Myths

The Top 6 Art Investment Myths

Read on as the Antique Sage debunks the top 6 art investment myths!  So if you are interested in investing in fine art and antiques, but are confused by all the misinformation, untruths and outright lies circulating on the topic, you’ve come to the right place.

 

1) Only millionaires can afford to invest in fine art and antiques

The idea that art is only for the wealthy is one of the ugliest, most persistent art investment myths out there.  It has been repeated so many times, by so many different people, that it has simply been accepted as being true without much thought.  This is understandable considering that films, books, magazines and newspaper have, intentionally or unintentionally, equated art investing with the ultra-rich.

And yet it is profoundly untrue, provided we are willing to entertain an open mind concerning what constitutes art.  Vintage mechanical wristwatches, antique sterling silverware, ancient coins and vintage fountain pens are all examples of antiques that are both moderately priced and investment-oriented.  In fact, I believe the greatest investment potential in the art market exists in the under $2,500 segment, with some investment grade artwork available for as little as $100.

 

2) Only paintings and full-sized sculptures count as art

This is one of those art investment myths born out of ignorance.  We are surrounded by a culture that lionizes the major arts – primarily painting and monumental sculpture – to the exclusion of all other art.  The rest of the visual arts, collectively known as the minor arts, have traditionally been treated as the red-headed step-children of the art world.  They are, at best, tolerated, but usually ignored.  This is a pity, because the minor arts boast some of the best workmanship and most alluring designs from hundreds of different cultures and time periods.  Yet, they receive almost no recognition in the art collecting community.

For example, traditional Japanese lacquerware is one of the most demanding, time-intensive crafts known to man.  It can take months for a skilled craftsman with decades of experience to prepare and apply the 25, 30 or even 40 layers of lacquer necessary to finish a single, high quality piece.  Yet, many Westerners have no idea fine lacquerware even exists, much less the skill and effort needed to create even a simple example.

So while paintings and large sculptures certainly qualify as art, I think that they are among the least interesting parts of today’s art market.  The minor arts, with their combination of reasonable pricing and phenomenal workmanship, are really the up and coming market segment.

 

3) Art is a poor investment compared to traditional assets like stocks and bonds

One of the today’s most popular art investment myths is that the traditional asset classes have decisively outperformed art since the mid 20th century.  According to this argument, broad stock market indices have tended to return around 10% per annum, give or take, over long periods of time.  But this assumes that an index investor immediately and unfailingly reinvests those dividends back into stocks – something that wasn’t even possible before the arrival of the first index funds in the mid 1970s.

In reality, the growth in nominal GDP in a national economy (or global economy, if you are investing overseas as well) tends to cap long-term returns for all asset classes in that economy.  We can prove this by looking at some annualized, long-term, U.S. asset class returns from 1947 through 2016:

  • U.S. Treasury Bills – 4.10%
  • U.S. Treasury Bonds – 5.36%
  • U.S. Nominal GDP Growth – 6.43%
  • S&P 500 (without dividends) – 7.38%
  • S&P 500 (with dividends) – 11.11%

Notice how all the returns generally cluster around the nominal long-term annual growth in the economy?  That is because the growth in the economy is how these returns are “paid” or transformed into the real purchasing power of goods and services.  The only true outlier, the S&P 500 with dividends reinvested, is a theoretical number that almost nobody actually got, because almost nobody systematically reinvested dividends between 1947 and 2016.

Now that passive ETFs and index mutual funds are everywhere, it is a pretty good bet that stock returns with dividends reinvested will tend to be no higher than nominal GDP growth over the long-term.  It is a bit like Heisenberg’s Uncertainty Principle applied to finance.  As long nobody knows about an investment trick, it works great.  Once everybody is aware of its existence, it doesn’t work anymore.

Right now, fine art and antiques are the investment trick that nobody knows about.  But these alternative assets have just as strong a claim to future GDP as stocks or bonds.  As an added bonus, because so few people have invested in art to date, there will almost certainly be a period of elevated returns as art prices “catch up” to fair value.

 

4) Only artworks from famous artists are investable

Another one of those enduring art investment myths is the unyielding belief that it is the artist that makes the artwork.  We have all read or heard stories of paintings by Vincent Van Gogh, Pablo Picasso, Gustav Klimt or some other renowned artist selling for eye-popping, 8-figure prices.  It is easy to assume that these works are famous because they were made by these influential artists.  And there is a certain element of truth to this assertion; a famous maker undoubtedly boosts the value of a work of art.

But, like most art investment myths, this fallacy overlooks a very important fact.  Artists become famous because their art is widely recognized as having great merit.  In the end, it is the visual impact of the art that is important, not who created it.  To put it another way, I would much rather buy a great work by a completely unknown artist, than a poor work by a famous artist.  And make no mistake; there are some world famous artists who have produced some really bad art.

This rule of buying the individual artwork rather than the artist goes double if you hope to make money by investing in art.  The quality of the work you are considering purchasing must always be your primary investment criteria.

 

5) Fine art and antiques are too illiquid to be good investments

One of the things that everybody loves about traditional assets, like stocks and bonds, is that they are tremendously liquid.  You can generally log into your online brokerage account and execute a trade in just a few minutes (or even seconds).  In contrast, art is not nearly as easy to buy or sell for fair value.  You usually have to consign a piece to an auction house, or sell via eBay or another online outlet.  And because the market is so thin, there is no guarantee that you will walk away with the amount you originally hoped to realize.

And yet, the illiquidity of the art market isn’t all bad.  Illiquidity restrains speculation and rapid turnover, meaning that the price you pay when investing in art is more likely to be a fair price, rather than an over-inflated, bubble price.  The U.S. stock market, on the other hand, has been plagued by recurring bubbles during the past 20 years which have whip-sawed weary investors with roller-coaster performance.  One of the reasons for these serial bubbles is undoubtedly the ease of trading in the stock market, which invites frenzied speculation.

 

6) Art investing is for insiders who can flip works for a quick profit

This is one of those insidious art investment myths – the idea that only “insiders”, like art gallery owners, art critics and obsessive connoisseurs, can really profit from art.  The second part of this misconception is that these insiders scour hidden, back-channel sources for great art before anyone else even knows it’s even there, and then turn around and almost immediately resell the works for big profits.  The sky-high bubble prices of contemporary artwork just a few years ago certainly adds to this perception.

But the reality is that most money in art is made by dedicated, but otherwise average investors who purchase good works at reasonable prices and then hold them for decades before selling.  In fact, I think that the minimum investment holding period for fine art and antiques is realistically 7 to 10 years.  Anyone looking to hold an artwork for less time should expect to take a loss on the sale.

Discreet Wealth and the Dark Side of Digital Assets

Discreet Wealth and the Dark Side of Digital Assets

We live in a world where money and ownership are largely digital concepts.  When you log into your online brokerage or retirement account, all the assets you see there – stocks, bonds, REITS – exist only as 1s and 0s on a database in some distant server farm.  Physical stock certificates and bearer bonds are rapidly approaching extinction.  Even that traditional bastion of tangible, discreet wealth, cash, is slowly transitioning to a digital-only form.

While digital registration and ownership has proven to be a boon to people in terms of convenience, it also conceals a dark side.  That singular drawback is the loss of privacy and control we face from having our all assets, records and bank accounts stored in the cloud.  Our personal financial data and digitally-registered assets can be compromised in a variety of different ways, something that is not possible with more traditional forms of discreet wealth.

For example, hackers and organized crime syndicates have proven very adept at bypassing the security protocols of banks, corporations and even governments.  Any personal information gathered can then be exploited to surreptitiously transfer our digital assets into the hands of criminals.  Alternatively, hacked personal information can be sold to the highest bidder on the darknet, leading to identity theft.

Another risk to having all your wealth stored in digital form is the rising litigiousness of American society.  It is estimated that the annual cost of civil lawsuits in the U.S. is $239 billion.  Unlike criminal cases, in the United States anybody can bring a civil lawsuit against you for any reason, no matter how petty, mean-spirited or false.  But one commonality is that the target is almost always money; individuals with valuable assets – especially those visible to prying digital eyes – should beware.

Even your friendly U.S. federal government can abuse the digital nature of modern wealth to help itself to some of your assets.  There is a controversial law on the books, known as civil asset forfeiture, that allows police officers and federal agents to seize cash, assets or financial accounts that are suspected of having been involved with illegal activities.  Civil asset forfeiture has most often been used against property involved in the illegal drug trade.  But, the IRS has also unilaterally used it against small businesses it feels are not “paying their fair share” of taxes.

In any case, prosecutors, police and federal officials undoubtedly misapply this statute in order to enrich their departments.  No criminal convictions, or even a criminal indictment, are necessary for the authorities to legally seize your money or property.  And these assets can be easily looked up online by government agencies using the ubiquitous social security number.  Once personal property, real estate or bank accounts are frozen, it can be time consuming and expensive to force the government to return wrongfully seized assets.

Most of us have come by our money honestly.  We work exceedingly hard, for very long hours for our wealth.  And we want to believe the money and assets sitting in our online accounts are safe from conmen, shady businessmen or cash-strapped government agencies.  I wish I could assure you that was the case.  Unfortunately, I can’t do that.

What I can do is offer you the next best thing: a solution.  Fine art and antiques are discreet wealth that is both portable and tangible.  They are one of the oldest ways of storing wealth.  Art and antiques have been used as an effective means to preserve and grow wealth by prosperous royalty, nobility and merchants for hundreds of years.

One of the key reasons antiques are so well-loved is because many of them are eminently portable.  A well-chosen collection of antique Continental European silverware or ancient silver Roman denarius coins might easily fit in a shoe box, but be worth more than a luxury car.  Discreet wealth like this could easily be stored in a safety deposit box, a home safe or any other secure location of your choosing.

Perhaps most importantly, fine art and antiques give you the ability to build long-term wealth without all the digital registrations, online passwords and tax identifiers required for traditional assets.  Art galleries, antique shops and antiquities dealers will gladly sell you a stunning array of fine pieces using your choice of cash, check or credit card.  Better yet, the art and antique industry has a sterling reputation for complete discretion when dealing with clients, both large and small.  Most will never disclose your personal information or purchases under any circumstances, unless required to by law.  Art and antiques allow you to reassert your fundamental right to investment privacy.

Just imagine.  You could have a $100,000 Surrealist painting hanging over the sofa in your living room, comfortably outside the vicissitudes of the digital world.  Or you could own a $25,000 Art Deco platinum and ruby necklace safely tucked into a hidden wall safe.  These tangible assets would compound for decades and decades at good, perhaps even great, rates of return.  And nobody would suspect you owned them, unless you chose to reveal it.

Of course, not all fine art and antiques cost tens or hundreds of thousands of dollars.  In fact, in my opinion, the most interesting part of the market is below $2,500.  And, within that niche, many categories of fine art and antiques are available for the shockingly low price of just a few hundred dollars or even less.  Discreet wealth may be hard to come by in the digital world, but in the world of art and antiques, it is still par for the course.

Why I Hate Index Funds and You Should Too

Why I Hate Index Funds and You Should Too

Index funds – ETFs or mutual funds that strive to track the performance of a securities index – are incredibly popular right now.  And why not?  They combine some of the best aspects of simplicity and diversification into a single, easy to trade investment vehicle.  Not surprisingly, index funds are ubiquitous at the moment.  You can find them in your IRA, 401-k and even in sophisticated hedge funds.

But the big reason investors love index funds is because of their low costs compared to actively managed mutual funds.  Many large, passively-managed index funds have expense ratios of only 0.05% to 0.20% annually.  This translates into $5 to $20 in fees per annum for every $10,000 invested.  These costs are far, far lower than actively managed equity mutual funds that typically have expense ratios between 0.60% and 1.00% every year.

Index funds are the modern no-muss, no-fuss way to invest for people who are overworked and don’t have the time or inclination to learn the intricacies of securities markets.  These incredibly flexible instruments can emulate the makeup and performance of almost any index in existence – anything from the pedestrian S&P 500 Index to the exotic FTSE Japan 50% Hedged to USD Index.  Index funds can also track fixed income or bond indices as well, like the Bloomberg Barclays US Aggregate Bond Index.

But maybe what people prize most about Index funds is how well they have performed over the past few years.  A common belief on Wall Street is that it is tough to beat an index during a bull market.  And that certainly appears to be the case with this bull market.  As an example, the Vanguard 500 Index Fund (Investor Shares) has returned a stellar 15.58% annually for the past 5 years as of November 30, 2017.  Many stock-focused index funds have had similarly phenomenal performance over the same period as well.

So why do I hate most index funds at the moment?  Aren’t they the perfect investment vehicle for a thoroughly modern, globalized world?  In a word: no.  They used to be the perfect investment vehicle a few years ago.  Now index funds are just financial time bombs waiting to blow your retirement dreams into tiny, shattered fragments of sadness.

First, it is important to understand that index funds are what is known in the investment industry as a passive strategy.  A passive investment strategy attempts to exactly replicate an existing index without any deviation.  This means that the money manager running a passive index fund has no input into which securities are purchased, held or sold.  He simply mimics the index he is targeting.  Once you dump your money into one of these vehicles it will be put to work immediately buying whatever is in the index.

This is exactly the behavior that most passive index investors want, but it also comes with a very negative side-effect that isn’t widely appreciated.  Index funds represent a price-insensitive source of buying (or selling) pressure.  In other words, it doesn’t matter how overvalued (or undervalued) the underlying index is, once a buy order is issued, the shares in the index are automatically purchased. Likewise, once a sell order is given, the shares in the index are immediately sold.

And guess what?  Most of the indiscriminate, index fund-driven buying happens near stock market peaks, when the trailing multi-year performance of the indices is strong.  Likewise, panic selling from index funds invariably occurs at the nadir of a bear market, when nobody cares how undervalued the companies in the indices are.  Buying high and selling low is never a recipe for strong investment performance.

Of course, you might be the one person who can stand strong against the overwhelming urge to sell your index funds when the bottom falls out of the market.  But even if you are, the price-insensitive buying or selling associated with the widespread ownership of index funds makes the entire stock market much more pro-cyclical than it would be otherwise.  Market highs are far higher, which isn’t a good thing because you will overpay when you invest for retirement, a house or that cruise around the world.  The lows are also much lower, which is bad because there is the chance you will be forced to cash out at the wrong time for reasons beyond your control.

As you might have guessed, right now the securities in most popular equity indices are egregiously overvalued.  I like the valuation estimates used by the fund manager John Hussman for reference.  According to one of his recent market commentaries, the broad stock market and, by extension, many passively managed index funds, are in line for somewhere close to 0% total returns annually over the next 12 years.  That is an awfully long time for an investor to be sitting on dead money.

Happily, a great alternative to over-hyped index funds exists.  I’m speaking about fine art and antiques of course.  These beautiful, tangible assets have been perennially overlooked by professional asset managers and financial advisors because Wall Street professionals don’t have the skills, knowledge or background to properly evaluate them.

It is one of those great ironies of life that the crowd always chases bad investments while good investments languish forgotten and unloved.  Currently millions of future stock market victims are furiously pouring billions of dollars they can’t afford to lose into index funds filled with securities trading at nosebleed valuations.  And yet, at the same time there are many categories of fine art and antiques that are currently trading at depressed valuations.

So please, consider investing in a World War II era U.S. Naval aviator insignia, or a 19th century old mine cut diamond or even a 2016 Mexican Libertad gold coin proof set.  But whatever you do, please don’t keep dumping your hard earned investment money into stock index funds, blindly expecting the great returns to keep rolling in.  You will almost certainly be sorely disappointed.