Advice and the Advisor

Flush investors take shine to rare coins

Given the record gains Wall Street posted in 2013, you might be tempted to think the financial dog days are behind us, at least for now.

But many wealthy investors continue to pour more of their fortunes into nonfinancial "treasure assets," such as collectible rare coins, in an attempt to diversify their portfolios.

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"In the environment that exists right now, where the Dow is very high … most of the people buying rare coins … are people who are taking profits as a result of a semibull market … and want to reinvest some of that money into nondollar-based-type investments," said Terry Hanlon, president of the Professional Numismatists Guild.

While the wealthy have always acquired art, antiques and other such valuables, experts believe that many of today's treasure seekers figure they're not only getting a beautiful object with their purchase but a savvy investment as well.

"We've been seeing many new buyers entering the rare-coin market in recent years," said Greg Rohan, president of Heritage Auctions, which claims to be the world's largest collectibles auctioneer. "Many have collected fine art and invested in precious metals but now also are diversifying their portfolios with rare coins because they can appreciate their beauty and history, while the coins appreciate in value over the long term."

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In 2012 the world's millionaires devoted an average of 9.6 percent of their fortunes to nonfinancial assets, such as collectibles, according to a survey by Barclays Wealth and Investment Management and Ledbury Research.

The poll, of 2,000 people with investable assets of $1.5 million or more, also found that the proportion of wealthy individuals who own treasure assets has increased over the past five years. Coin collections, specifically, are up about 2 percent.

Drawing a pretty penny

But what really motivates investors to buy collectibles? Is it perceived financial benefits, emotional impulse or, perhaps, both? The answer isn't clear.

"All types of financial decisions are inescapably tied to our emotions, and behavioral pitfalls [such as] fear, greed and a host of cognitive biases plague portfolios more than the markets themselves," said certified financial planner Milo Benningfield, founding principal of Benningfield Financial Advisors. "These pitfalls are magnified exponentially when contemplating art, coins and other collectibles."

Emotional investment or not, collectible rare coins are drawing a pretty penny. About a decade ago, a six- or seven-figure price tag was an eyebrow-raiser. Today, not so much.

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"The 'Mona Lisas' and Gauguins of numismatics are just exploding in price, as records are being broken virtually every time they come up for sale at auction," said Jeffrey Bernberg, past president of the Professional Numismatists Guild, in a news release.

In fact, rare coins soared 248 percent in value over the past 10 years, according to the Luxury Investments Index, found in the Knight Frank 2013 Wealth Report.

Fear-driven diversification

American silver dollar coins
Helen H. Richardson | The Denver Post | Getty Images

"I think people are starting to decide that they want to start dipping their feet in the water again," said rare-coin dealer Ken Smaltz, who owns K. Smaltz Inc., a company that buys and sells rare coins and precious metals. Smaltz said he's seen an increase in his business within the last several months.

"People are concerned about the economy," he said. "All of these fears cause investors to possibly seek to diversify their investment, and the type of investments they … look for in this type of environment are usually precious metals and rare coins."

The recent spike in sales of collectibles, such as rare coins, art and antiques, may reflect the increase in liquid assets the wealthy have to spend.

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"People [are] taking some of those profits derived from the equities market and the stock market and putting some of that into rare coins," said Hanlon of the Professional Numismatists Guild.

There's no question the rich have gotten richer. The average net worth of the so-called "Forbes 400," Forbes magazine's annual listing of the richest Americans, is now a record $5 billion. That's $800 million more than a year ago.

And a recent study compiled by Wealth-X, a firm that researches ultrahigh-net-worth individuals, found that the wealthiest people in each U.S. state were 19 percent richer last year than they were in 2012.

That gives rich investors more disposable income to spend on luxury items such as collectibles.

Markets in fashionable alternatives such as art [and] coins ... are all inherently speculative investments. They produce no income [and] have no future productive capacity.
Daniel Egan
director of behavioral finance and investments, Betterment

Like any investment, rare coins and other collectibles—considered safer than stocks by some—carry their own risks. In fact, some financial experts, including Daniel Egan, director of behavioral finance and investments at brokerage services firm Betterment, are reluctant to recommend buying treasure assets to their clients.

"Markets in fashionable alternatives such as art [and] coins ... are all inherently speculative investments," said Egan. "They produce no income [and] have no future productive capacity.

"The entire reason you 'invest' in them is that you may be able to sell them to someone else in the future for a higher price," he added.

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Rare coins can be bought or traded through auction houses and dealers or directly from individual owners. But the market is unregulated, making investors frequent targets of fraud.

The office of New York State Attorney General Eric Schneiderman warns investors of this danger.

"There are many steps potential investors can take to minimize this risk, including conducting advance research about the coins and requesting full disclosure from the vendor regarding the value, source and future market value of the coins," said a spokesman for Schneiderman's office.

Selection of gold coins at London auction house.
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In July 2012 a prominent Rhode Island hand surgeon pleaded guilty in New York to selling fake ancient Greek coins. Dr. Arnold-Peter Weiss was arrested at the Waldorf Astoria hotel while trying to sell the coins at the 40th annual New York International Numismatic Convention.

Smaltz said that, despite such instances, improved grading systems—available through companies such as Numismatic Guaranty Corp. (NGC) and Professional Coin Grading Service (PCGS)—have made it easier to determine the provenance and condition of a coin.

Rohan at Heritage Auctioneer agreed. "There's also an added dimension in that the Internet and the tremendous confidence that independent, third-party authentication and grading provides to buyers have made rare coins, by far, the most liquid of all hard assets other than bullion," he said.

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Fraud aside, there's also the risk of theft: Rare coins being easy to steal because of their small size.

"The owner should have a robust security system in place if he or she stores [coins] at home," said Gary Raphael, senior vice president for risk consulting at ACE Private Risk Services. "Insurance, of course, is another cost. The annual premium for insuring them with a valuables policy from ACE could range from 1.5 percent to 1.8 percent of the coins' value each year."

Favored tax status

Stocks don't carry this risk, since investments are recorded digitally and also pay dividends—which coins don't. Still, dealers like Smaltz believe there are more benefits to investing in rare coins than not," he said.

For example, the buying and selling of rare coins is a private transaction conducted solely between dealer and investor.

"I think the reason people like to collect coins is because, out of all the investments out there, there's no recording of your names given out to anyone," said Smaltz. "When you buy from me, its private."

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Rare coins also receive favorable tax treatment. David Kautter, managing director of the Kogod Tax Center at American University, said investors enjoy two main tax benefits when it comes to their rare-coin investments.

"They are treated as capital assets, so no tax is imposed as they appreciate in value," he said. "The appreciation is not taxed until the coins are sold, and then the tax rate is only 20 percent, not the top individual tax rate of 39.6 percent."

How to get started

Kautter also said that in some cases, rare coins may be exchanged for another rare coin or bullion without paying any tax on the transaction.

Rare-coin investors can protect themselves by enlisting the help of experts or dealers, especially when deciding whether to buy or sell.

Smaltz doesn't recommend one type of coin, such as gold or silver, over another because he caters to his clients' preferences. He does, however, suggest buying coins with key dates; these dates make some coins, such as a 1913 S Buffalo Nickel, more valuable than others.

According to Smaltz, buying through a dealer such as himself is less expensive than bidding at auction. That way, investors avoid auction-house fees and markups.

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"When you go through an auction … you're paying 20 percent to purchase it and you're paying another 20 percent to the house," he said. "Before the coin is even out there, you're already 40 percent in."

Inexperienced buyers don't have to jump headfirst into the rare-coin market. An investor can buy a rare coin for as little as $25.

An ongoing increase in sales of collectibles, such as rare coins, may ultimately come down to how the economy performs. But if you're still on the fence about the idea, you can always flip a coin.