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What Is the Optimal Asset Allocation of Art and Antiques in Your Portfolio?

What Is the Optimal Asset Allocation of Art and Antiques in Your Portfolio

There is one pertinent question frequently asked by both new and seasoned collectors of fine art and antiques.  What should your total investment portfolio’s asset allocation be to these intriguing, alternative assets?  Is there a percentage that is too high?  Is there another that is too low?  Is it possible to calculate any “right” number at all?

If you listen to the advice of conventional financial advisors the number should be zero.  They apparently don’t believe that investment quality art and antiques exist.  But I suppose I shouldn’t blame them.  After all, they’ve probably never seen a collection of ancient Greek electrum coins struck in stunningly high relief or a room full of brilliantly colored, medieval French illuminated manuscripts.  But, this doesn’t mean I can condone their uninformed opinion presented as authoritative truth.  Investing ignorance is an ugly thing.

If you’ve found your way to the Antique Sage website, there is a good chance you are fed up with the conventional wisdom of mainstream financial managers.  I know I am.  So you won’t be surprised to hear that after 14 years in the financial industry, I have come to a somewhat different conclusion.  I think that art and antiques are an indispensable asset class that belong in almost every well diversified portfolio.  There is only one question remaining in my mind.  How much should you own?

Let’s start with examining an appropriate lower bound for art allocation in a portfolio.  In my opinion, 2% is the magic number here.  Why 2%?  Because once you drop below this threshold, any contribution art can make to your bottom line is minimal.

Think of it this way.  At a 2% allocation, your art or antique collection would have to increase in value by a robust 50% before it would even contribute a scant 1% increase to your overall investment portfolio.  To believe you can dedicate less than 2% of your investment portfolio to art and still have it meaningfully impact your future investment performance is simply unrealistic.

The maximum asset allocation for art and antiques, on the other hand, has other factors at play.  Art produces no income in the form of dividends or interest.  It is also usually highly illiquid, with a relatively wide bid-ask spread.  This can make it difficult to sell pieces quickly for fair value.  Although they sound bad, these attributes are not completely negative, as I lay out in my article titled “Illiquidity – The Unlikely Ally of the Art Collector“.  However, these two attributes – no income production and illiquidity – are the primary factors limiting the amount of your portfolio that can be safely dedicated to art and antiques.

As a rule of thumb, I consider 25% to be a reasonable upper bound for the asset allocation of art in an investment portfolio.  This assumes that the rest of the portfolio is well diversified between stocks, bonds, real estate and cash.  Keep in mind that this upper limit is only a guideline, though.  Many people might be comfortable with a lower percentage, like 5%, 10% or 15%, and I certainly have no problem with that.

I can also foresee a special situation where one might want to consider going above the 25% asset allocation boundary for fine art and antiques.  For example, an extreme overweight might be appropriate in an environment where one or more of the traditional asset classes – stocks, bonds or cash – have zero or negative expected long-term returns.  Unfortunately, as of early 2017, it appears we are living in just such a time.

Right now two out of three of the traditional asset classes – stocks and cash – have little realistic prospect of returning significantly more than zero over the next decade.  Because of this it might make sense to substitute art for a portion of one of these underperforming asset classes.  In this case, I believe swapping an investment grade art or antique collection in place of some stocks is a logical conclusion.  However, adopting an unconventional strategy like this would require that the cash portion of your portfolio also be increased simultaneously to help offset liquidity risk.

I honestly believe that a healthy 10% or 15% asset allocation to investment quality art and antiques is a necessity in the present age.  The future returns on traditional paper assets are likely to be very disappointing going forward.  Art and antiques are perhaps one of the few places left where an investor can hope for a solid 5% return or better over the next decade or two.  While an art allocation between 2% to 25% is normally ideal, in light of the current investing environment, I could see a savvy connoisseur of fine art and antiques safely increasing his allocation to 30% or even 40% of his investment portfolio.

The Intriguing Relationship between Coin Prices and GDP

The Intriguing Relationship between Coin Prices and GDP

Numismatics – the study of coins – is a massive field.  It spans thousands of different varieties of coins minted anytime during the last 2700 years, from the 7th century BC to the present day.  These coins were struck in empires, kingdoms, sultanates, provinces, colonies and nations all over the globe.  But there is a little known observation about coin prices and GDP that can be of tremendous importance to everyone from the casual collector to the most well-heeled investor.

The general price level of old and obsolete coinage from a country is directly related to that country’s GDP (gross domestic product).  GDP is defined as the value of all the goods and services produced in a country during one year.  In other words GDP is the size of a country’s economy, with richer nations having higher GDPs than less wealthy nations.

Interestingly, a country’s coin prices have a direct relationship to its GDP.  Simply put, the higher a country’s GDP, the higher the price of its antique coins.  This is due to the fact that a developed nation’s economy is able to support many collectors.  And more coin collectors translate directly into more demand, which naturally leads to higher prices.

But there’s a catch.  Coin collectors are most likely to collect coins from their native country.  Almost everyone is interested in their own country’s history, culture and art.  So U.S. collectors tend to collect U.S. coins, while British collectors are apt to collect British coins and Japanese collectors naturally gravitate towards Japanese coins.  This tendency isn’t ironclad of course.  Some collectors do branch out into “foreign” coins, foreign being relative to the collector’s home country.

So this little tidbit of information allows us to draw some broad conclusions about coin prices and GDP.  Old U.S. coins usually have the highest prices and largest market share in global numismatics because of the United State’s massive GDP (estimated at over 18 trillion dollars for 2016).  Coins from other developed nations – aka high GDP countries – like Japan, Great Britain, France and Germany also have relatively high prices.

On the other hand, emerging market countries with much smaller GDPs are only able to support relatively small collector bases.  Predictably, prices for coins from these emerging economies concentrated in Africa, the Middle East, South America and South Asia are, as a general rule, much lower than for developed nations’ coinage.

Exceptions always exist of course.  China is one of them.  Its GDP has grown so large, so quickly that it still has a relatively underdeveloped middle class and, by extension, collector base.  Therefore, prices for Chinese coins are still lower than its prodigious GDP would initially indicate.  As time goes on and its native collecting community grows, however, that is likely to change.

Another quirk of the relationship between coin prices and GDP is that it only applies to modern coins.  Modern, in this case, means coins struck anytime after circa 1700 AD.  The reason for this is simple.  Many people from all over the world are interested in ancient and medieval history, mythology and lore.  Legends, myths and archetypes are usually cross-cultural.  This interest ultimately manifests itself as broad-based, international collector demand.  Therefore, ancient and medieval coins, being tangible repositories of this mythos, are attractive to a broad swath of collectors, regardless of country of citizenship or nationality.

Let’s look at ancient Greek coins as an example.  Where does the collector demand for these coins originate?  Well, ancient Greek coins are widely considered to be numismatic masterpieces.  These impressive coins are held in prestigious private collections and fine museums all over the world.  Demand for them is truly international.  In fact, I would wager that most ancient Greek coin collectors today are (non-Greek) Europeans or Americans.  Contemporary Greeks may love their heritage, including their country’s ancient coinage, but their purchases make up only a tiny portion of the total demand for ancient Greek coins.

I should note that the year 1700 is not a decisive dividing line between medieval and modern coinage either.  It is really more of a general rule, with lots of gray area on either side.  It does help that most countries struck coins by hand before 1700 while converting to more mechanized production methods afterwards.  But 1700 is still a rather imperfect date, subject to a great deal of variation.

Japanese coinage is a good example of this.  Japan was ruled by the Tokugawa shogunate from 1603 to 1867.  While Europe was rapidly industrializing, Japan pursued an isolationist foreign policy.  Because of this, Japan during the Tokugawa shogunate was really structured like a medieval kingdom with a classically feudal society.  This means that Japanese coins struck during the Tokugawa shogunate – the era of the samurai – have broad appeal outside of Japan and, by extension, a widespread foreign collector base.  Demand and prices aren’t tied directly to Japan’s GDP as it is with Japan’s more modern, post-Tokugawa coinage.

The relationship between coin prices and GDP has two major implications.  First, it should be obvious that a savvy investor can exploit this situation to lay bets on individual national economies.  For example, if you think India’s economy is going to do exceptionally well over the next decade or two, then assembling a collection of high quality, modern (post 1700 AD) Indian coins makes a lot of sense.

The corollary to this theory of coin prices and GDP is that ancient and medieval coins are the blue chips of the numismatic market.  Their prices don’t rely upon good economic performance in any one country.  Instead, ancient and medieval coinage is more of a wager on the growth of global GDP.  Under this scenario, it doesn’t matter who is prosperous or where they live.  All that is important is that a certain portion of that global prosperity will predictably materialize as demand for ancient and medieval coinage.

Saving for Retirement? You’d Better Have a Backup Investment Plan

Saving for Retirement? You'd Better Have a Backup Investment Plan

If you know anything about investing, I suspect that you may have come to some of the same conclusions that I have.  Our capital markets are deeply broken.  They no longer fulfill their basic mission of efficiently allocating money to productive businesses and ventures in the real world.

Savings accounts shouldn’t pay less than 1%.  U.S. Treasury bonds shouldn’t yield between 1% and 3%.  Large multi-national companies shouldn’t trade at prices that imply they will carve up the world among themselves in some kind of a neo-feudalistic, dystopian future. And yet, here we are, wandering, bewildered, through an economic wasteland.

The securities markets gyrate wildly, yet ever upward, as we vainly hope that the false wealth will last until we can personally cash out and flee to some remote tropical paradise.  For most of us, including those currently toiling away on Wall Street, that day will never come.  Instead, both our dismal economic history and dark monetary future will eventually converge, and probably when we least expect it.

I am aware of the counterarguments.  The economy has been growing reliably, although anemically, since The Great Recession of 2008-2009.  The U.S. Federal Reserve will keep interest rates ultra low for as long as necessary in order to stoke economic growth.  The Federal Government is completely dependent for its tax revenue on our Frankenstein economy and will, therefore, never tolerate a serious market dislocation.

A few of these claims even have some validity.  For example, I sincerely believe the Federal Reserve will keep interest rates depressed for the foreseeable future.  But sometimes a disaster looms on the horizon and there is absolutely nothing anyone can do to avoid it.

I also believe the world’s business oligarchs and politicians will fight any financial chaos with the full might of their great wealth and formidable influence.  And yet, in spite of this, I think that the powerful and moneyed classes will ultimately be incapable of slowing the great arc of history as it bends toward a grand economic rebalancing.

The winds of economic change are already beginning to blow, albeit faintly.  The surprise election of Donald Trump to the U.S. presidency was one indicator that the financial status quo is beginning to fail.  The Brexit – Great Britain’s unexpected exit from the Euro Zone – was another such event.  There will surely be many other even more remarkable developments over the months and years to come.  As financial conditions inevitably become less favorable your old investment plan may no longer be ideal.

If you are currently saving for retirement, it is imperative you pay attention to these trends.  The investing world as you know it – the stable, benign, everyone’s a winner market of the last 35 odd years – is in the process of fundamentally changing.  Although the securities markets seem placid so far, the tremors have already begun.

You need a reliable backup investment plan for this new reality.  While I believe in and highly recommend investment grade art and antiques, there are other possibilities as well.  It could be a burglary safe full of precious metal bullion.  Or it could be a rental property that you paid cash for.  Or it could be timber land that you intend to log in the future.

But whatever unconventional asset you choose, it must meet two criteria.  First, it had better be a physical, tangible investment that you personally control.  This will keep at least part of your net worth out of the paper asset casino that dominates most retirement accounts.  And maintaining personal control will ensure that you aren’t at the mercy of an incompetent management team or an out-of-touch board of directors.

Second, it is vital to finance any alternative asset purchase using either very little or, preferably, no debt.  While the debt financing window is wide open today, there will surely come a time in the not-so-distant future when refinancing your debt, even against good collateral, will be impossible.  It is far wiser to be debt free and not risk blowing up your carefully constructed backup investment plan.

Financial change is coming.  The clues are already out there in the real world for all to see.  Get yourself a good alternative investment plan while there is still time left.  There is a slim possibility you won’t need it, but it is better to be financially safe than sorry.

The Great Lie of U.S. Household Net Worth

The Great Lie of U.S. Household Net Worth

According to statistics compiled by the U.S. Federal Reserve, U.S. households and non-profit organizations had an aggregate net worth of nearly $90.2 trillion as of September 30, 2016.  This is a fabulous, almost unbelievably large sum of money.  It confirms the United States as the richest, most prosperous nation in the history of the earth.

Time and time again, people have used this statistic to justify higher government expenditures or enhanced Federal social programs.  After all, being the wealthiest nation on earth, we should be able to afford nationalized healthcare, a complete overhaul of the country’s infrastructure, free college education or whatever your personal political hot button issue happens to be.  Everybody loves a windfall, right?

There is only one problem with the U.S. household net worth numbers.  They are a total, complete and utter fabrication.  It is a lie of such boldness that all other financial lies must defer to it.  The Truth – with a capital “T” – concerning U.S. household net worth is, unfortunately, rather grim.

The U.S. financial authorities, led by the Federal Reserve, have embarked on the grandest monetary experiment ever conceived in human history.  For over 20 years now they have repeatedly liquefied financial markets at any incipient sign of weakness.  This has been tantamount to a decree that no wealthy banker, hedge fund manager or speculator will be left behind.

This corrupt public policy has resulted in serial bubbles in security and real estate markets throughout the country.  Indeed, this misguided experiment has been so compelling that many other nations’ central banks have also joined in, causing stock, bond and property bubbles to become a synchronized, global affair.

At first these bubbles were viewed as an unmitigated good.  This is typical of great inflations. The negative side effects only come later, sometimes much later.  Unfortunately for the United States – and the rest of the world too – our dark future is beginning to close in around us rather quickly at this point.

And that leads us back to the aggregate household net worth number given at the beginning of this article – that fantastical 90.2 trillion dollar amount.  Over the past year this gargantuan sum ostensibly increased by 5.2 trillion dollars.  Over the past 3 years U.S. household net worth surged by 14.1 trillion dollars.  Over the past 5 years it ballooned by 28.7 trillion dollars.

And yet, in spite of this false prosperity, the U.S. is not one penny richer than it was 5 years ago.  In fact, I suspect it is poorer – possibly much poorer.  How can I reconcile this dreary assertion with the official, and much more sanguine, numbers staring me right in the face?

To put it simply, I don’t believe the numbers.  I actually downloaded the quarterly Balance Sheet of Households and Nonprofit Organizations (B.101) straight from the Federal Reserve website and played around with the figures.  What I discovered was illuminating.

First a quick breakdown of how all this household wealth is held.  The lion’s share, $73.1 trillion, is in financial assets, primarily bank deposits, stocks, bonds, mutual funds, pensions and the ownership of private businesses.  A further $26.1 trillion is attributable to real estate, both buildings and raw land.  The final amount, a meager $5.9 trillion is held in the form of equipment, consumer durable goods and intellectual property.

These three categories total $105.1 trillion.  Against this amount are liabilities of $14.9 trillion, mostly mortgages, car loans, student loans and other consumer debts.  These two numbers net out to the $90.2 trillion U.S. household net worth sum sited above.

But I wanted to have a better idea of what the real picture looks like.  So I applied a discount to many of the assets (and liabilities) from the spreadsheet.  I effectively assumed that many of these securities are significantly overvalued and will ultimately need to be written down in value in order to be realigned with reality.

So here is what I did.  I generously accepted that all bank deposits and U.S. treasury securities are worth 100 cents on the dollar, with no write-downs necessary.  I discounted most financial assets, including stocks, bonds, pensions and mutual funds by anywhere from 25% to 75%.  These are the securities that are most egregiously overvalued.

I then assumed that real estate is fairly valued at a 20% to 40% discount from the current market value.  Most of this price decline would be absorbed by the excessively expensive coastal cities.  Flyover country would largely get a bye here.

In order to be fair, I also wrote down the liabilities side of the household balance sheet as well – anywhere from 25% to 60%.  If we are realistic, not all those mortgages and student loans are getting paid back in full.

When I ran the final numbers the results were stunning.  That astonishingly high 90.2 trillion dollar U.S. household net worth declined to between $47.4 and $66.7 trillion.  That is a 26% to 47% household net worth haircut!  And I believe I was fairly conservative in my estimates as well.  I wouldn’t be the least bit surprised if the final write-downs were even larger than these numbers.

This is ultimately why I urge everybody to allocate a portion of their investment portfolio to fine art and antiques.  The global economy is sick to its core.  When this singular truth is finally revealed, it is paper assets like stocks and bonds that will ultimately bear the brunt of the resulting financial chaos and panic.  The United States isn’t nearly as wealthy as its political and business elite think, but you don’t have to march off the financial cliff with them.