Passion Investing: A Beginner’s Guide
Investments are not only about picking the right stock anymore. Crafting an investment portfolio today can look like any number of strategies, one of which is passion investing.
Apart from traditional assets, investments can include tangible assets such as whisky, fine art, vintage cars, and antique furniture. These non-traditional assets can allow you to make investment decisions based on more than an earnings report or an analyst ranking, but instead based on your passions.
What is Passion Investing?
Passion investing refers to investing in non-traditional assets that generally allow you to enjoy the ownership of the asset while holding it in your portfolio. Passion investors value more than just potential market returns, and instead want their investment portfolio to reflect their passions and interests.
Passion investing can also refer to a lens used to choose investments. For example, investors who are passionate about social justice and the environment may choose to only invest in ESG products. Passion investing as a lens adjusts the main goal of a portfolio away from pure financial returns and towards industries or products that the individual investor cares about.
What is the Difference Between Passion Investing and Other Investment Strategies?
Passion investing focuses on both the aesthetic or cultural value of an investment and the potential capital appreciation an investment can produce. Most traditional investment strategies look only to time horizon, risk appetite, and income/capital appreciate goals. Passion investing differentiates itself by looking at all above mentioned characteristics, but also determining industries or assets to hold based on the interest of the individual investor.
“Art is one of the only passion investments that can appreciate in value as you appreciate it in your home”
What are Passion Assets?
The breadth of passion investment is ever-growing with a range of luxury collectables. However, how we consume each of our passions is unique to their category. For fine wines and limited-edition whisky, we may wait for a special occasion to open and drink it. For handbags and watches, we may wear it to a special event. All these assets, although linked to the investor’s hobbies and personal interests, cannot be freely enjoyed without depreciating in value. Except for art. To enjoy art, all you have to do is look at it. As a result, art is one of the only passion investments that can appreciate in value as you appreciate it in your home.
According to the 2022 Art Basel and UBS Art Market Report, 61% of high-net-worth collectors report allocating over 10% of their portfolios into art. Blue-chip art is distinct from other asset classes in that its price appreciation has low correlation with the returns on stocks and bonds, according to a 2022 CitiBank Report. This low correlation can help reduce risk levels and temper volatility.
As a result, historically, contemporary art outperforms the stock market during economic downturns. Citi found that “art has proven to be an excellent store of wealth over all time periods, easily exceeding inflation.” In fact, Citi found that from 1962-2021, annualized art returns have run well above inflation. For example, in the 1970s when real interest rates were frequently negative, cash and bonds from developed economies saw negative returns after adjusting for inflation while the price-weighted Masterworks.io index saw an annualized return of 10% over the decade.
Gen-Z collectors had the highest average portion of wealth dedicated to art investment, with over a third allocating more than 30% of their overall portfolio, from the 2022 Art Market Report. These investors are likely not motivated by excess returns alone. Owning art has many emotional benefits that can arguably outweigh the appreciation potential.
For car enthusiasts, one way to diversify an investment portfolio is to start collecting classic cars. Unlike fine wine or whisky, which is hard to enjoy without drinking, classic cars provide some amount of use without affecting the value.
Car-loving investors can use the HAGI (Historic Automobile Group International) indices to chart performance of classic car investments. These indices include the HAGI Top, which measures the price of selected rare vehicles, as well as specific indices that measure high profile brands such as Mercedes Benz, Ferrari, and Porsche. The HAGI Top index has increased 264.49% since its inception in December 2008 through December 2021, despite seeing a pullback in returns during Covid-19.
Investing in classic cars individually can require a lot of attention spent on maintenance. It may be difficult to find a good mechanic or get the right parts, and you need to find somewhere to house the car for the period of ownership. Often, investors choosing this passion asset make that decision because they enjoy the maintenance aspect of classic cars. If that is not the case, there are also investment funds that provide fractional ownership of a classic car portfolio.
Aging like a fine wine is a common expression for a reason. The quality and scarcity of fine wine appreciates over time, and its value follows suit. The basic principle of fine wine investing is that you buy bottles of wine and then store them to sell at a higher price later on.
To open the market up to more retail investors, there are also blue-chip wine stocks and funds, as well as wine investment companies. These vehicles allow people to invest in the fine wine asset class without building a wine cellar or finding a professional storage.
The fine wine market outperformed mainstream equities and ETFs, and was less volatile than real estate or gold in 2021, according to research by Liv-Ex. The Liv-Ex Wine index tracks the price of 100 sought-after wines and has yielded a 13.6% annualized return since 2003, meaning an investor would double their money roughly every 6 or 7 years.
Looking at the Knight Frank Luxury Investment Index (KFLII), an index that measures various luxury-grade assets, fine wine stacks up well against other real asset investments. In 2021, KFLII measured 16% YoY returns in the wine market, leading the pack above other luxury assets, and almost doubling the Index average of 9% YoY growth.
Jewelry & Watches
The Knight Frank Luxury Investment Index shows jewelry providing a 138% return over the past 10 years. Jewelry and watches both have much lower associated costs of storage and maintenance compared to other passion assets such as wine or cars.
Watches are much more than timepieces in the world of alternative assets. Luxury watches are increasingly appreciated for their history, exclusivity, technology, and craftsmanship. Watches topped the Knight Frank Luxury Investment Index in 2021 along with wine, showing 16% growth for the year.
Along with other passion assets on this list, there are additional ways to invest in jewelry and watches than just buying and holding it yourself. There are watch and jewelry funds that allow you to invest in an array of the asset without having to make the quality determinations yourself.
Potential Benefits of Passion Investing
Passion investing at its core is about the joy of owning or investing in a particular tangible asset. Whether buying a piece of art or a classic car, investors can expect to enjoy the ownership of the asset they are purchasing – they can hang the art to view daily and can take the car out for beautiful drives. The non-financial benefit of being able to enjoy your investment assets is a leading reason investors choose to invest in their passions.
There are additional ways to invest in passion assets that do not include the physical ownership – investment funds and fractional shares for example. These methods have aided in the democratization of luxury asset classes.
Investment-grade collectibles can provide diversification benefits and help to hedge against inflation and volatility. Like other alternative assets, luxury collectibles show low correlation with equity markets.
CitiBank research found that Art has a .09 correlation with developed market equities, while Post-War & Contemporary art and Impressionist & Modern Art have -0.04 and 0.11 correlation respectively. Commodities as a whole show 0.11 correlation with developed market equities. Wine has a low positive correlation of 0.13 with developed equities, according to Vinovest. Low correlation can help provide a level of protection from general market fluctuations that impact traditional assets.
Potential Risks of Passion Investing
Passion investing typically requires a long-term wealth management strategy due to the long-term hold nature of these assets. Returns rely on capital growth, which can take many years to materialize, and still provide no guarantee that an asset’s value won’t decrease. Investors looking to receive a consistent income or have quick access to the sale of their assets would likely be best suited investing in other assets.
Illiquidity is a main concern for investors looking at tangible assets. Given passion assets’ niche appeal and high prices, there is not generally a secondary market available for fast and immediate sales. Often, investors have to play a waiting game to see when the right buyer will come along.
The rarity of collectibles means they are often subject to fraud or forgery. The market for rare goods can be small, opaque, and less regulated than traditional markets. As with any investment, it is important to do comprehensive research before purchasing an asset.
For rare items, this research may include determining its authenticity, provenance, and legal ownership and often requires the help of specialists. Auction houses are the most common marketplaces for luxury goods. This can be beneficial because it provides a greater guarantee of authenticity and a group of potential buyers and sellers of goods. However, auction houses can often charge a large commission which can eat into excess returns from selling a passion asset.
This is another reason an investor may choose to invest in a fund. Fund managers will do all due diligence required to determine authenticity and do not require individual action at auctions.
This material is provided for informational purposes only and should be relied on as investment advice. Diversification and asset allocation do not ensure profit or guarantee against loss. There are significant differences between art and other asset classes. Investing involves risk, including loss of principal.