Investing in collectibles or rare items can indeed be a financial fallacy due to several reasons. Most importantly, the value of collectibles and rare items tends not to be intrinsic and could be depicted as subjective. Unlike investments like bonds and stocks, which derive value from cash flows like interest payments and dividends, the value of a collectible depends entirely on what another buyer is willing to pay for it, which is highly unpredictable and unreliable.
Additionally, markets for collectibles can be illiquid, meaning it could be challenging to find a buyer when you want to sell. Finally, the upkeep cost, insurance, and storage can erode any potential profits. Lastly, rare items and collectibles do not generate any income while you hold them, unlike assets like real estate or dividends-paying stocks.
The idea of purchasing something tangible, like an antique or piece of art, can feel more satisfying and ‘real’ than buying a stock or bond. We romanticize the notion of that rare gem hiding at a garage sale, waiting to be discovered and sold for a fortune. Yet, the odds of this happening are incredibly small, and often we lose money or break even at best.
An appropriate financial practice focusses on investing in assets that have reliable, measurable returns. Investments should be diversified across a range of asset classes to spread risk. Regularly reviewing and rebalancing your portfolio and planning for the long term rather than seeking short-term gains is also a prudent approach.
Further readings about this financial fallacy:
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“The Little Book of Common Sense Investing” by John C. Bogle. Book Link. This book provides insights on prioritizing low-cost, diversified index funds over risky investment options like collectibles.
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“A Random Walk Down Wall Street” by Burton G. Malkiel. Book Link. It includes explanations about the volatility and unpredictability of non-traditional investment markets.
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“The Psychology of Money” by Morgan Housel. Book Link. This book offers insights into the emotional and psychological aspects of finance that might lead one to fall for such fallacies.
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“The Risks of Investing in Art and Collectibles” Investopedia – This provides a more in-depth look into the risks of investing in collectibles.
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“Alternative Investments” - Wikipedia.
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“Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” by Nassim Nicholas Taleb. Book Link. An exploration of luck, randomness, and probability, which play significant roles in the markets for rare items and collectibles.