You've worked hard and have been very patient, and now you have made money—lots of it.
Like many folks who have experienced a large liquidity event, you're ready for some immediate gratification. So you are looking to splurge. Perhaps you want to buy a high-end car, a boat or a private jet. You may even look at purchasing a luxury watch. Whatever form of indulgence it takes, it's a shiny trophy and it's going to be yours.
Unfortunately, many luxury consumers fail to consider the extent to which their purchase will hold its value over the years. In many cases, buyers eventually decide to resell a luxury item, only to find themselves losing a big chunk of the purchase price to depreciation.
That's why it behooves consumers—whether they view their purchase as an investment or just as a gift to themselves—to do a little homework before pulling out their credit card or checkbook. Knowing which kinds of purchases are likely to appreciate and which ones will not can save a lot of consternation down the road.
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This is a timely issue for wealthy investors. It has been hard to generate good returns in a stock market that's already richly priced. And recent volatility hasn't made traditional investment assets any more attractive.
As a result, some investors are sinking their cash into luxury items rather than stocks. That Lamborghini will be fun to drive, they figure, and maybe it will appreciate as well.
"Before you buy, I recommend that you evaluate your ultimate goal and speak with your financial advisor to assess."
The truth is, some luxury items can indeed be smart investments. They may appreciate nicely or, at the very least, retain their value, in case you need to sell it in an emergency.
So what's the difference between items that appreciate and those that depreciate? Why has the value of that watch risen 50 percent over the past three years, while the price that car can fetch dropped by 50 percent? It turns out that a luxury item's appreciation power has more to do with its scarcity than its original price.
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In today's mass-produced luxury market, high price and great design don't necessarily translate to a high return on investment. Most often, your luxury item must be extremely rare in order to maintain its desirability.
The big question, of course, is how to determine whether the particular item you've got your eye on is likely to gain or lose value. While there's no way to be absolutely certain, studying the current after-market prices of luxury goods can be a good place to start.
You can track the price appreciation of a range of luxury goods through various indexes. As an example, for paintings, antiques and other artwork, there's the Mei Moses Fine Art Index, which lists auction sales history from the major auction houses, such as Sotheby's and Christie's. Remember to study the provenance—the record of previous ownership—to gauge a piece of art's authenticity. Coins, stamps and all manner of other items have their own versions of these indexes, so you may want to do your homework.
None of these markets, of course, is as transparent, information-rich or liquid as the stock or bond markets.
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The right high-net-worth financial advisor can also help to parse your options. From an investment point of view, many advisors will give their blessing to a 5 percent or 10 percent portfolio allocation to the right luxury items.
Bear in mind that while every investment comes with fees, luxury items can be both expensive to buy and to keep. That million-dollar yacht, for instance, may cost $100,000 per year to staff, outfit and maintain. The same 10 percent rule of thumb goes for your aircraft.
There's certainly nothing wrong with giving yourself a gift in the form of a big-ticket purchase. However, before you buy, I recommend that you evaluate your ultimate goal and speak with your financial advisor to assess.
If you expect your item to maintain or increase its value, you owe it to yourself to determine how realistic that expectation is.
—By Mark Van Mourick, wealth advisor and CEO of Optivest Wealth Management
