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Explained: What is passion investing and who should consider it?

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Passion investing can be an effective way for portfolio diversification when done correctly.

Explained: What is passion investing and who should consider it?
Passion Investing is about collecting your object of desire or investing in them to turn your passion into profits. Although it's been around for a few decades, passion investing isn't just another fad contrary to popular belief. Instead, passion Investing works on the assumption that assets will gain in their value through their apparent rarity, and collectibles today will become the object of desire that people take pleasure from owning at a later date.
It has to be approached with a detailed and well-defined framework as you approach your other investments. However, if done correctly and systematically, you can have the best of both worlds, a constantly evolving collection of whatever you're interested in (object of desire) and a way to diversify your portfolio with some unique and more personal assets.
Passion investing can be an effective way for portfolio diversification when done correctly. It has transitioned from a hobby to a lifestyle to investment over decades. In Passion Investment, the word passion is followed by investment; hence it should be considered a passion first and investment later. Investors can start small and gradually build a passion investment portfolio. Investors can allocate up to 10-15 percent of their portfolio to art collections as it can become a sub-asset class.
Their value does not rise and fall simultaneously as the stock market, so they could help minimize the pain of stock market downturns. In addition, these types of investments typically tend to do well during times of economic uncertainty. However, their financial returns are far from assured or predictable. Finally, one should note that they are volatile as well as illiquid, hence can rarely be liquidated overnight, especially when you need the cash quickly.
Passion investing should only be considered a long-term investment strategy and a part of a broader wealth management strategy. In addition, there are various luxury collectibles like Wine, Art, Watches, Coins, Jewellery, Cars, Stamps, Coloured Diamonds, Antique furniture, Chinese ceramics, etc.
Each different luxury investment has pros and cons, but it is best to choose the one you love and have knowledge of. Look at how different passion investments have performed over the past ten years and then buy the assets you are passionate about and that have the potential to appreciate. Knight Frank Luxury Investment Index provides a useful source of information, particularly on luxury investments such as cars and jewellery. The report looks at how different luxury investments have performed over the past ten years and has become one of the go-to reports for measuring passion investments worldwide. It is prudent to build it over time and diversify within this sub-asset class rather than putting all your eggs in one basket.
There is a high level of risks involved, as passion investing, in particular, is substantially different from other investment markets. Undertaking detailed due diligence is vital for the investors, as the available market intelligence and public information about an artwork may be limited. It is imperative to know the asset, the seller, hidden costs, and the asset's authenticity. The market is small, opaque, highly fragmented, unregulated, and usually have issues like illiquidity and valuation subjectivity.
A comprehensive due diligence process and experienced legal and transaction counsel can help investors take informed investment decisions and mitigate risk. Also, to note is that there is cost associated with selling and buying of passion assets as they usually involve the services of a specialist auction house, and commissions can be high, often in the region of 15-30 percent. In addition, one has to factor in the cost of ownership, including the insurance cost of passion asset, its maintenance, and storage cost, as incorrect storage and maintenance often adversely impact the realisation price, requiring a professional approach or custody of many luxury items.
Passion Investing may be more fun than traditional investing, as it allows one to enjoy the asset of desire. It requires serious effort however when done right, passion investing can be a journey to an ultimate reward.
The author, Prashant Joshi, is Co-founder at Fintrust Advisors. The views expressed are personal
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