Art of Investing in collectibles

Collectibles can include art, antiques, old coins, vintage cars, stamps, rare books, Persian rugs, baseball cards, bottles of fine wine and other items that offer the potential for appreciation in value. Unlike other investment vehicles, these items generally do not generate any type of cash flow during the time that they're owned (unless the property is so rare and exquisite that you can open a museum and charge admission for patrons to view it). In addition, a number of other characteristics make collectibles investing significantly different from investing in financial securities.

First, specialized knowledge is necessary in order to be able to determine the value of a specific collectible, whether it's a work of fine art, a rare book, or a vintage car. It can be quite easy to pay too much for a collectible if you don't have the expertise and familiarity required to judge the particular item. You should therefore be knowledgeable about the factors that determine the value of the specific collectible.

Furthermore, the markets for collectibles are informal as well as unregulated. When buying or selling a collectible item, it's important to have an idea of the worth of the item because you're dealing with individual buyers or sellers. There are no current price lists as there are with stocks and other financial instruments. Similarly, there is no governmental body such as the Securities and Exchange Commission (SEC) that regulates companies who list their securities on the financial markets. You can easily pay too much or sell your collectible for far too little without being able to seek any recourse from an official regulator. Additionally, many collectibles are bought and sold at auctions, where prices can vary greatly.

Supply and demand generally determines the value for collectibles. For example, the supply of paintings of those artists who are considered to be the truly great masters is limited; it can, therefore, require huge sums of money to invest in these items. Think about it: what actually makes a work of art by da Vinci, van Gogh, Picasso, or Salvador Dali worth two million, twenty million, or a hundred million dollars? It's the fact that they are others who are willing to pay those prices to acquire such works. By comparison, the works of unknown artists are much more available, thus they're bought and sold and far lower price levels.

Investing in collectibles will also likely not bring particularly fast profits. As stated previously, there's no underlying cash stream upon which to base the item's value or return-on-investment. Returns are only realized when collectibles appreciate in value and are sold at a higher price than that at which they were purchased. This desired increase can often take a number of years – at the very least – to materialize.

Finally, collectibles must be characterized as illiquid assets because they're not easily converted into cash. Added are the high transaction costs associated with liquidation of these items. Regardless, investing in collectibles provides a definite sense of pleasure and enjoyment for many individuals. If collectibles are of interest to you, there is any number of easily accessible books, magazines, and websites to provide you with specific information on the many different types of potential investments available. As with any investment, however, proceed with knowledge and prudence.

Investment Objectives

Before you even invest , you should take a honest look at your own objectives. This is just some general investment objectives, not  specific needs such as retirement at a certain age or college plans for children . However, there is certainly a correlation between the two, and it is useful to know the characteristics of each of these investment goals:

 •Preservation of capital – you are  more concerned with safety than return. Treasury bills and money market funds may be most appropriate.

•Current income-  you  need a portfolio that produces steady income for current living expenses. Bonds, annuities, and stocks with high dividends (such as utility stocks) may be appropriate.

•Tax-exempt income - the investor's

•Growth and income – you are  looking for a portfolio that generates some amount of income, but you are  looking for capital appreciation as well (often for protection against inflation).

 Appropriate investments could include a mix of bonds and stocks.

•Capital appreciation – your  goal is likely retirement or another event in the future, where growth is required and current income is not needed. A diversified stock or mutual fund portfolio is appropriate.

•Aggressive growth – you are  looking for high-risk investments with a potential for very large returns. This is rarely the goal for an entire portfolio, but rather for a specific portion of assets. Aggressive growth funds and small-cap issues may be most appropriate.

Types of Investment Risks

Investment Risks

Risk is simply the measurable possibility of either losing value or not gaining value. In investment terms, risk is the uncertainty that an investment will deliver its expected return. Before you can make suitable investment,  you must understand the concept of risk, the types of investment risk associated with various investment vehicles and the amount of risk that you are willing to assume. In general, you must first understand that no investment is without risk and that there is a trade-off between returns and the amount of risk an investor is willing to assume in order to reach his or her financial goals.

The following is a quick introduction on what risk is, the different kinds, and how diversification can help to minimize risk.Business Risk

Business risk is the measure of risk associated with a particular security. It is also known as unsystematic risk and refers to the risk associated with a specific issuer of a security. Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds. A common way to avoid unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many different companies.

Credit Risk

This refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. Typically, the higher the credit risk, the higher the interest rate on the bond.

Interest Rate Risk

Interest rate risk is the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Whenever investors buy securities that offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks.

Furthermore, understand the various factors that influence interest rates, so that you can learn to anticipate their movements for your benefit in the article, Trying to Predict Interest Rates.

Taxability Risk

This applies to municipal bond offerings, and refers to the risk that a security that was issued with tax-exempt status could potentially lose that status prior to maturity. Since municipal bonds carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower after-tax yield than originally planned.

Call Risk

Call risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream.

Inflationary Risk

Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or income will be eroded as inflation shrinks the value of a country's currency. Put another way, it is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline. The best way to fight this type of risk is through appreciable investments, such as stocks or convertible bonds, which have a growth component that stays ahead of inflation over the long term.

Liquidity Risk

Liquidity risk refers to the possibility that an investor may not be able to buy or sell an investment as and when desired or in sufficient quantities because opportunities are limited. A good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a property at any given moment should the need arise, unlike government securities or blue chip stocks.

Market Risk

Market risk, also called systematic risk, is a risk that will affect all securities in the same manner. In other words, it is caused by some factor that cannot be controlled by diversification. This is an important point to consider when you are recommending mutual funds, which are appealing to investors in large part because they are a quick way to diversify. You must always ask yourself what kind of diversification your client needs.

Reinvestment Risk

In a declining interest rate environment, bondholders who have bonds coming due or being called face the difficult task of investing the proceeds in bond issues with equal or greater interest rates than the redeemed bonds. As a result, they are often forced to purchase securities that do not provide the same level of income, unless they take on more credit or market risk and buy bonds with lower credit ratings. This situation is known as reinvestment risk: it is the risk that falling interest rates will lead to a decline in cash flow from an investment when its principal and interest payments are reinvested at lower rates.

Social/Political Risk

Risk associated with the possibility of nationalization, unfavorable government action or social changes resulting in a loss of value is called social or political risk.

Currency/Exchange Rate Risk

Currency or exchange rate risk is a form of risk that arises from the change in price of one currency against another. The constant fluctuations in the foreign currency in which an investment is denominated vis-à-vis one's home currency may add risk to the value of a security.

Local investors will need to convert any profits from foreign assets into Sing dollars. If the dollar is strong, the value of a foreign stock or bond purchased on a foreign exchange will decline. This risk is particularly augmented if the currency of one particular country drops significantly and all of one's investments are in that country's foreign assets. If the  Sing dollar is weak, however, the value of the local investor's foreign assets will rise.

Understandably, currency risk is greater for shorter term investments, which do not have time to level off like longer term foreign investments.

Micro credit Scheme

If you have not heard of it, the concept was pioneered by economist Muhamad Yunus who founded the Grameen Bank in the 1970s to give small loans to the poor in INdia to help them start small businesses as a way out of proverty. He won the 2006 Nobel Peace Prize & the model has been relicated all over after that.

We have started our own here in spore.It was launched a yr ago with $5 million in seed funding & has since approved 31 loans. The scheme is not a handout, but a real commerical loan for tsoe who traditionally do not have access to credit. It charges  between 8 to 12 % interest pa. And borrowers must be Sporeans with annual incomes of less than $30,000-. Loan can be repaid by 10 years.

POBS is behind the scheme by being the loan adminstartor. SE Hub provides free space for the scheme's office.. Retired banker Mr Kuo How Nam is volunteering as chairman of the loan committee.

For more info call 6774-4318 or go to any POSB to pick up an application