You may think of luxury goods – think an elegant Rolex or classy Chanel handbag – as well-deserved treats for working hard and saving up. However, these purchases can also be legitimate investments.
The luxury goods market has grown consistently and recovered quickly from the pandemic. We examine whether such goods are worthy additions to your portfolio, as well as your wardrobe.
What kind of investment are they?
A luxury good’s status as an investment can be defined in two ways. The first measures the item’s value based on its cost per use. In other words, the price of the good is averaged out by the number of times it is used – the lower the eventual cost, the better.
Take, for example, a cheaper but lower quality and/or trendy handbag, that might break easily or go out of style overnight, versus a more expensive one that will last for years and that you’ll enjoy using time and time again. Though you may initially pay more for the latter, eventually its cost per use may be lower than the first’s. In the same vein, if you keep buying bags to replace the cheaper ones that break or that you easily tire of, their accumulated cost per use may turn out to be higher than that of a pricier classic you keep returning to.
The second definition is more conventionally associated with investing, and centres around the value of the item as determined by the market, and its growth (or depreciation) over time.
While luxury goods’ worth as per the first definition is largely subject to personal taste and preference, their worth as per the second can be trickier to determine. Unlike traditional investments such as stocks and bonds, luxury goods are physical assets. This means they have inherent value that is fairly stable and resistant to inflation. Such goods could help to diversify a portfolio of financial assets.
However, just as with any asset, their value is based on the market’s supply and demand, making some goods better investments than others. As physical assets, they may also be prone to wear and tear that reduce their value, especially if not used carefully or stored properly.
What is the state of the luxury goods market?
The luxury goods market more than doubled from 2000 to 2019 (US$142 billion to US$313 billion). Despite contracting due to COVID-19, it resumed growth in the first quarter of 2021.
Top performers in the market regularly include wine, cars, handbags and watches, as tracked by Knight Frank’s Luxury Investment Index. Handbags in particular topped the index in 2020, with prices rising 17% due to established online auctions and the seeking out of relatively affordable luxuries to weather the pandemic. While this captured activity across a variety of brands, Hermès handbags accounted for the largest price increases.
Luxury brands also seem to be relatively recession-proof, due to well-heeled clientele that may be less affected, or even gain, during a downturn. These brands’ goods in fact increase in exclusivity during such times as fewer are able to afford them, adding to their value.
Furthermore, several brands increase their prices regularly, even during downturns. This not only helps them keep up with inflation and cover any dips in profit, but also boosts their prestigious brand image. Consumers’ difficulties in accessing the exclusive primary market lead to an active resale market; brands’ price increases ensure prices in this secondary market are kept high as well.
Why do such goods appreciate?
The value of luxury goods and their potential to appreciate are usually tied to a number of factors. These include exclusivity or rarity, their condition, whether they continue to be fashionable, and popularity in social media and pop culture. Brands’ price increases also contribute to their goods growing in value.
Hence, luxury goods that meet these criteria generally hold their value, and will likely appreciate with time. Due to their limited circulation and evergreen styles, Hermès’ Birkin and Kelly handbags, as well as Patek Philippe and Rolex watches, have seen healthy appreciation and even record-breaking resale prices. Other brands that have seen their classic items maintain their value include Chanel and Louis Vuitton.
How do they compare to other investments?
While certain luxury items have astronomically increased in value, most usually have a more moderate rate of appreciation. On average, in the resale market, Hermès handbags maintain 80% of their value, while Chanel and Louis Vuitton bags hold 63%. Select Rolex and Patek Philippe models hold a resale value of 150% to 175% .
However, those who hold on to such pieces and keep them in mint condition, could see the resale value grow with time. Luxury handbag reseller Baghunter’s report stated that Birkin bags provided a 14.2% year on year return over 1980 to 2015.
In comparison, the rate of return for other investments could vary from 0.8% for a low-risk investment like a fixed deposit account, to 8% for the S&P 500. In other words, investing in a luxury piece might earn you returns comparable to other types of investments. But only if you choose something with a brand and qualities that will be continuously well-received, keep the item in a brand-new state or close to it, and have the patience to wait for its value to grow as the brands hike their prices year after year.
Another downside to luxury goods as compared to other investments may be the high buy-in. While you can buy a stock or Exchange-Traded Fund with less than a hundred dollars, the prices of luxury goods usually range in the thousands. Prices soar even higher if you want to guarantee a decent return and seek out items with rare characteristics.
As a physical asset, a luxury good would also be relatively illiquid; you would need to find a buyer for the price point you desire. Between this, and the care needed to select and maintain the item, luxury goods are a fairly inefficient form of investing.
While luxury goods’ high-quality workmanship and designs mean you’ll likely get good value in terms of how much use you’ll get out of them, it takes significant time and resources to select, care for and sell a piece that will bring you decent returns. If what you’re after is sheer enjoyment of the item, it’s probably best not to concern yourself with whether it can earn you money.
However, if you have a passion for certain luxury goods, they could be an interesting and rewarding addition to your portfolio. As the returns (apart from those for rare and exceptional items) may vary, they should preferably help diversify your portfolio, instead of comprising your primary investment vehicle.
And if you are keen for a piece of the luxury market but don’t want to risk getting the goods, you could buy into a fund that tracks the global luxury index.