The Top Five... Steps for successful investing, applied to collectibles

Entitled The Five-Step Formula for Successful Investing, it began...

"If you want sound, classic investment advice, you've come to the right place. The lessons you're about to learn are timeless and straightforward... but sadly, hardly ever followed. What's more, the financial crisis has actually substantiated this classic formula for successful investing..."

This last sentence, about the financial crisis, especially grabbed our interest. And it turns out that the 'Five-Steps' come from Burt Malkiel, and offer some pretty sound advice for handling traditional investments.

Malkiel's investment tome, A Random Walk Down Wall Street, is considered a classic by many investment experts. So, here, we see how his tips measure up to the collectibles markets...

1, There's no need to time the market

In other words, short-term buying and selling doesn't work in the long term. The vast majority of investors can't time the markets consistently, yet this isn't necessary to being successful.

So, instead, think long-term. This is where the recession-proof value appreciations of most collectibles come into play. To aid your long-term planning, investigate past auction performances or indexes like the PFC40 Autograph Index.

2, Use dollar-cost averaging

Dollar cost averaging is a timing strategy of investing equal dollar amounts regularly and periodically over specific time periods.

According to Malkiel, if you invested $1,000 a year for five years, you'd have $6,167 in a volatile bear-bull market versus only $5,915 in a steadily rising market.

On the other hand, if you invested just £1,250 in a Diana, Princess of Wales signed photo and spent nothing more the following year, it could be worth £4,250 in five years, and £8,500 in 10 years (an overall appreciation of 580.0% based on historic price changes in the PFC40 Autograph Index).

Alternatively, if autographs aren't your thing, the value of a horizontal pair of Seychelles 1893 3c. and 4c. Surcharge stamps appreciated from £4,750 to £13,000 in ten years - an increase in value of £8,250 (or 173.7%).

In terms of the amount you spend and the profit you make, collectibles seem the preferable option.

3, Rebalance your portfolio every year

Here, Malkiel advises that investors annually rebalance their stock between a stock and bond index, for lower volatility and higher returns. His advice is to sell your portfolio's big winners, and buy its biggest losers every year.

In collectibles, this is where the operative word 'collecting' comes into play. If your portfolio has a big winner, in terms of appreciation, then you can either sell it or feel confident that it will continue to appreciate in future years.

Of if you're disappointed with the value or price offered for an item in your collection, then boost it with a further purchase. For instance, a Jimmy Page autograph will be worth more sold if with autographs of the other three original members of Led Zeppelin.

Or, let's say you have a Monroe autograph... Why not boost its potential future value by selling it with a related piece of memorabilia, like a lock of her hair or rare photograph?

4, A three worded mantra: diversify, diversify, diversify

Malkiel's advice is simple and extremely conservative: organise your portfolio between 50% bond fund, 25% stock index fund and 25% international stock index fund. That's strong advice, for sure - but your money is still subjected to market fluctuations and all-round unpredictability.

With this in mind, the alternative idea of balancing your portfolio between rare coins (shown to accumulate gains of anything from 90% to 200% over eight years); stamps (some appreciating even more than 200%); or autographs (gains of 900% over ten years for an Andy Warhol signed photo) suddenly seems even more appealing, doesn't it?

5, Cost Matters

The advice for traditional investors is to use non-actively managed index funds to save costs.

With collectibles, if you're look to save on costs than opt for an area of collectibles which requires less maintenance. For instance, fines wines require a wine cellar. Classic cars, also, may require ongoing 'management' costs.

However, other assets like coins and stamps can be safely tucked away, or art can be placed on your wall and left to appreciate while you enjoy it for years to come.

'Turn $100,000 into $250,000 in 10 years...'

That's what the email we received says can be achieved through investing in the traditional markets, over a ten-year long period.

But here's the thing: we think that you can benefit even more from the collectibles markets.

If you're undecided, have a look at our compiled indexes - including for autographs and rare stamps - and see the evidence for yourself.

 

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