In our Filipino culture, we tend to equate anything pricey to an investment.
“I’m going to invest in the latest cell phone model,” someone who just got his or her bonus might say. “I just invested in a new flat screen TV,” you might hear from an OFW who has recently decided to come home for good.
To be fair, one could argue that these purchases indeed allow several enjoyments such as convenient communication and better television viewing at home. However, as there is very little possibility that these things will increase in value over time, they can’t really be considered as true investments but assets that eventually depreciate in value.
Strictly speaking, an investment offers the possibility of generating future income or profit. You might have heard of “safer” investments such as government bonds, money market funds, and time deposits. Compared to other options, these are relatively low-risk.
But how about luxury items?
In 2016, it was reported that a luxury bag can be a better investment than gold1. Depending on the leather, hardware, and brand, it may retain or increase in value over time.
Luxury bags that cost millions of pesos already symbolize status and wealth, but the possibility of cash returns make them even more alluring. The same thing can be said about certain vintage watches, classic cars, artwork, and wines2. These luxury goods can increase in value under the right circumstances. When done right, investing in luxury items can even help mitigate the possible negative consequences of a financial crisis.
But here’s the big question: Are luxury goods the right kind of investment for you?
Look at the big picture
It’s understandable why people would be more excited about an opportunity to invest in luxury goods over an opportunity to invest in traditional investment vehicles like stocks and bonds. Luxury goods offer a possibility of cash returns while allowing people to indulge in expensive items or to pursue passions at the same time. Luxury items are tangible which adds a psychological benefit of immediate gratification that other kinds of investments cannot give.
However, trying to understand the investment potential of luxury items can be a bit tricky. Just like any other investment, they come with risks. If a person is living from paycheck to paycheck or just starting to build his or her portfolio, luxury items might not be best options to start with because they are volatile and are subject to trends.
This means that a luxury bag or watch may cost hundreds of thousands today but may easily lose its value depending on cultural influences, celebrity preferences, and brand image. This unpredictability makes luxury goods a risky gamble for people who don’t have a clear investment strategy.
Plus, investing in luxury goods takes a deep level understanding of an item’s history and tradition. It takes special knowledge to know if a certain item can bring financial rewards in the future. In most cases, the resale value of a luxury item is dependent on how well the owner cared for it. This is why some serious investors are willing to pay hefty fees for insurance and proper storage of things like paintings or vintage cars.
Clearly, investing in luxury goods is not a bad thing altogether. It has its place in the big picture. But a solid understanding of the principles of investment is necessary to be able to make it truly profitable.
Investment or status symbol?
The term “investment” has been overused in daily language that the meaning has become blurred for a lot of us. This is especially true for luxury purchases because there is a potential to see returns while having to enjoy ownership of a status symbol. At the end of the day, it’s still all about intelligent money management and knowing how much you can afford to risk.
If you do not have emergency funds because you are constantly “investing” in luxury bags or watches, then maybe it’s time to rethink how you handle money. You don’t want to be forced to sell your prized possessions at a lower amount because you suddenly need cash to pay for an emergency expense.
Investment is not a contest of who has the flashiest, shiniest, or riskiest properties. It’s about knowing the best places to invest money to see income in the future. It’s easy to have a false sense of financial security when you are surrounded by luxurious investments that cost much, But remember that having a well-balanced portfolio is better than owning status symbols.
To ensure your financial health, you need to explore investment vehicles that will help you secure your future first. There’s is nothing wrong with investing in luxury items but you need to set your financial foundation before taking a leap and choosing riskier options.
1 Time. Why The Hermès Birkin Bag is a Better Investment Than Gold
2 Reader's Digest. Affordable luxury goods investments that actually pay off