Should you Invest in Luxury Goods?

Lately, luxury goods have become an alternate option to more conventional forms of investment such as equities, real estate and gold. Various categories including art, watches, handbags, wine, cars and even sneakers are regarded as collectable assets. 

The key questions are: Is it a wise decision to invest in luxury goods? How to turn your passion of collecting luxury goods into a profitable investment?

Over the years, significant increase in the value of luxury goods have motivated conspicuous buyers to invest in these goods to not only exhibit their status but also to earn return on their investment. Excellence in craftsmanship, design and quality along with timelessness of luxury goods differentiate them from just being an accessory to being considered as a lifelong possession which can be passed over generations.

There are various factors that have made luxury goods so sought after and desirable among buyers. Luxury goods often have long waiting periods. Their history, heritage, exclusivity and rarity create highest brand value and pricing power. Older luxury items with rare colours and style or certain luxury brand models that have been discontinued often increase the consumer desirability which result in higher prices of these brands in the secondary markets. These elements perfectly align with the fundamental economics of demand and supply and thus luxury goods are seen as good store of value in long-term.

The attention garnered by luxury goods as a robust and attractive asset class is well supported by the returns that some of these items have generated over the last decade. For example, investment in top luxury watch brands like Rolex, Patek Philippe and Audemars Piguet have significantly outperformed S&P 500 return over the last 5 years with average annual returns exceeding 20% as compared to S&P 500’s meagre returns of 8% during the same period. Rolex watches alone have increased in value of around 50% on an average in the last 5 years.

A 2022 wealth report by Knight Frank identified whisky as one of the best performing luxury investment class with returns of over 400% in the last decade. Bags from brands like Hermes and Chanel have seen consistent increase in value over the years. The 2023 luxury investment index by Knight Frank pegged the overall growth of weighted basket of 10 collectibles by 7% in the last one year ending June 2023. Art, which has caught the eye of many prudent investors, grew by over 30% in the last year, as per report by AMR’s All Art index. Other luxury items like classic cars have also shown significant performance over the years.

Today, even items like Sneakers have emerged as a new and lucrative alternative for wealth creation.  It is surprising to see sneakers generating over hundred percent returns with immediate liquidity in preowned marketplaces.

The robustness, attractiveness and popularity of any asset class for investing can significantly increase with factors like easy availability of ready market for liquidation of asset, transparent price discovery and ability to track historical performance. In luxury industry, several brands are establishing their own pre-owned/buy-back programs to encourage aspirational luxury buyers to own these brands. Rolex recently introduced certified pre-owned program to allow consumers to buy Rolex watch with greater assurance and authenticity, thereby encouraging people to invest in a brand which has one of the largest counterfeits for its products.

It is also pertinent to note that all luxury items may not depict similar kind of trends in terms of generating returns with many of such items even diminishing its worth owing to factors like socio-cultural references, brand reputation and celebrity association. Hence, when considering a luxury item for investment, it is worth noting that things that appeal to you due to your personal preference such as your favorite car, watch or bag may not sell easily in the pre-owned market or in other words, may not generate good returns. This volatility makes investment in luxury goods a risky proposition unless buyers have in-depth knowledge about luxury industry. One needs to do extensive study and research to identify an item’s past history, popularity and pricing trends before finalizing the purchase. It is thus important to invest in the right item at the right time and the right price to create wealth.

(Please note: This article is already published in BW)