Individuals in search of positive inflation-adjusted returns are hard pressed to find many investment options to their liking these days. Through the first quarter of 2014, the S&P 500 has returned a disappointing 1.3%, while the Dow has performed even worse. An overall slowdown in the global economy, including disappointing manufacturing data from China, inconsistent monthly jobs reports and a residential real estate market that has likely peaked have all contributed to an underperforming market. Additionally, thanks to the Federal Reserve’s massive asset base expansion and unprecedented bond buying program, most fixed income options, including money market accounts, are yielding negative real returns. Considering the relatively poor performance of more traditional investment options, more and more individuals are looking at collectibles as an investment option, as this market has done quite well over the past decade. According to Elliott Wave, the rare coin market has logged returns of 248% over the past ten years. While the rare coin market has the opportunity to produce above market returns, it can also be detrimental to individuals that aren’t numismatists. In this article, we’ll highlight three ways that investors commonly lose money in the rare coin market.
A sure fire way to lose your shirt in the rare coin market is to heavily invest in all new commemorative coins issued by the U.S. Mint and world mints. For example, the new Dr. Who coins produced by the New Zealand Mint are great collectible pieces, especially if you’re a fan of the show. However, at an issue price of seven times the spot price of silver, the likelihood of these coins appreciating in value on par with the overall rare coin market is slim. In fact, you would be hard pressed to name many recent U.S. issued commemorative coins that have performed well over the years. The only two recent examples that come to mind are the 2001 American Silver Buffalo coins and the 2009 Ultra High Relief double eagle gold coins. While time will tell, the recently issued 2014 National Baseball Hall of Fame coins, which we wrote about in a previous piece for Money.org, have the potential to endure and appreciate in value in line with the overall rare coin market. Considering that many modern issued commemorative coins can be purchased today at or below the original issue price, proper due diligence should be conducted before wading into this market.
While there are many coin brokers that look out for their clients’ best interests, unfortunately that’s not always the case, as we highlighted in a previous article. While it’s fine to trust the recommendations of your broker, it’s also wise to verify that what they’re attempting to sell you is a solid investment at a reasonable price. Based on discussions we’ve had with customers who have used brokers in the past, one of their favorite products to sell are certified modern gold and silver coins, which they commonly sell at a substantial premium over the melt value of the underlying metals. This is likely due to the high commissions they receive from their suppliers for the sale of the coins. The fact of the matter is that all gold and silver bullion and proof coins that are issued by the U.S. Mint are in uncirculated condition, so unless you’re considering a rare or limited edition modern certified gold or silver coin, it may be best to save your money and instead purchase a nice uncirculated example of the coin at a substantially lower price. Taking all of your coin broker’s recommendations at face value, without researching further, is likely to lead to long term underperformance of your rare coin portfolio.
Failing to diversify a rare coin collection is a common mistake made by individuals that are purchasing rare coins for investment purposes. As with stocks and many other investments, there will be times when certain coins and precious metals outperform others, so if you have a diversified collection of coins, you’re more likely to see less volatility and higher returns over time. For example, the price of silver and platinum can be especially volatile, so rather than investing purely in these coins, consider adding some numismatic coins composed of other metals to your portfolio, whose value primarily derives from the rarity, condition, and demand of the coins, as opposed to the metal value of the coins. Purchasing coins in varying condition at different price points may also be a good strategy, as this may broaden the potential market available to you when the time comes to sell your numismatic coins.
In summary, we’ve highlighted three surefire ways to lose money in the rare coin market. Investing heavily in modern issued commemorative coins, most of which fail to appreciate in value, will likely lead to poor returns. Secondly, accepting all of the recommendations from your coin broker, without first verifying that the coin offerings are sound investments, is likely to backfire on you. Lastly, failing to diversify into coins composed of different underlying metals and at various price points may increase the volatility and reduce the long term returns of your rare coin collection.