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From stock tables to Shaker chairs

Devalued markets are sending investors in search of alternatives for their money: from fine wines to antique furniture, art to stamps. But such investments are fraught with risk, experts warn

Special to The Globe and Mail

Diamond broker Colin Ferguson has a hard time finding the words to describe his prize possession, a brilliant and intense purplish-pink, two-carat, round gem that he recently purchased by tender at an invitation-only auction in Geneva.

Words like "exquisite" or "magnificent" fall short, he says. "The stone has a certain magic in it."

But when he puts this stone of intangible beauty on the market, it will be as a tangible asset with a minimum asking price of $1.28-million (U.S.)

And Mr. Ferguson is confident that he will find a buyer, since rare coloured diamonds are now hot investment commodities, as well as fashionable status symbols for the rich and famous.

No matter what jewellery retailers may tell their customers, there is seldom any investment opportunity in the ordinary white diamonds that grace millions of engagement rings, according to Mr. Ferguson, president of Vancouver-based Diamonds Direct Inc. Rare coloured stones that sell for $50,000 or more, however, have increased in value by as much as five times in the past four years, and are still "skyrocketing."

"I sell to some very sophisticated wealthy investors. With the markets the way they've been, it is a way to diversify," Mr. Ferguson says.

Devalued stock markets and low interest rates have prompted many investors to look for alternative places to put their money, and rare diamonds are among many tangible assets they are buying up as they run away from the bear market.

Some investors are turning to the art pages from business news, setting aside analysts' reports in favour of auction catalogues. They are logging off E*Trade and clicking onto eBay. People who used to spend their days monitoring stock tickers and indexes are now studying trends in stamp collecting or rebalancing their portfolio of hockey cards.

While some are investing in art, others are parking their money in vintage cars or pouring liquid assets into fine wines. Cautious investors are looking for a safe haven in gold coins, while speculators are scouring flea markets and hoping for a bull market in antique china.

This treasure hunt is being fostered by reports from analysts, auctioneers and dealers who have tracked sales of art, antiques and other classes of tangible assets, creating indexes that can be compared with stock indexes.

For example, Vancouver-based art dealer, analyst and publisher Anthony Westbridge's composite index of Canadian art sales, called the Canadian Art Sales Index, shows an increase of 9.15 per cent over one year, 28.9 per cent over five years and 18.9 per cent over 10 years.

The British-based Antique Collectors Club maintains that its Antique Furniture Index has consistently outperformed the Financial Times 250 stock index, as well as house prices in southeast England, since 1973. The London-based Wine Index Ltd. makes similar claims for its Fine Wine Index.

Even stamp collectors are getting in on the act. The London-based Stanley Gibbons Ltd. launched the SG100 last year, an index based on sales of the world's 100 most frequently traded stamps. Initial analysis showed that the index increased by 31.2 per cent over the past five years. The company's finance director, Mike Hall, says the index "should encourage more investors to choose stamps as an alternative means of achieving the returns they have failed to obtain from traditional investment routes in recent years."

Investors are looking for "any port in the storm," says financial adviser Warren Baldwin, regional vice-president of TE Financial Consultants Ltd. "We are faced with traditional investment markets at their worst-performing levels in 60 years. With that as our framework, people will tend to be more motivated to look at alternative strategies. Nothing can be as bad as losing 75 per cent of your tech portfolio, so they are saying, 'Let's buy some art that we can at least enjoy, whether its going up or down or sideways in price.' "

But investing in art, antiques, stamp collections and other similar classes of tangible assets is risky and fraught with problems, Mr. Baldwin maintains. "If you're going to buy something like that, you'd better enjoy it because you may not make very much money on it," he says.

These things are tricky as investments for many reasons, he says. There are risks involved in purchasing the items, as you have to make sure that you are getting a genuine article and get evidence of its pedigree, while making a good guess that its price is still on the way up. Holding on to the asset involves ongoing costs of insurance and, possibly, storage, upkeep or restoration. And finally there is the difficulty of selling it, he adds. "It's not like the XYZ mutual fund that you can redeem in three days."

Mr. Baldwin notes that would-be investors in art or antiques often hold on to their collections for life, with the result that they end up in their estates, where they can create further problems.

Often various family members want the same things, he says, "and there's a battle. If you had invested in a mutual fund, it would be half for your son and half for your daughter, and we're done."

Don't invest in tangible assets until you have built up a good solid portfolio of traditional investment vehicles, suggests Cynthia Kett, a certified financial planner and principal at Toronto-based Stewart & Kett Financial Advisors Inc. She says some of her clients invest in various things, from collectibles to racehorses, but they do so mainly because they have a passion for them.

"If the sky came falling down, they would have value. But, typically, when the sky comes falling down, you're going to be selling at a firesale price."

Collectibles may have enduring value, but it may be difficult to convert that value into cash when your need it, Ms. Kett warns.

This is the basic flaw in the strategy of investing in tangible assets, says Dunnery Best, managing director and head of private client investing at CIBC Wood Gundy Inc. "The reason that people buy securities is that there is an open call market and in all of those alternative investments, there is no open call market. Liquidity is what breeds proper valuation and liquidity in all of those areas is less effective than in capital markets."

Mr. Best notes that the advent of on-line auctions and Internet sites that track worldwide sales in art, antiques and collectibles has helped make these alternative marketplaces somewhat more efficient, but he says it still makes more sense to invest in commodities through the stock market.

Mr. Ferguson, the diamond broker, agrees that gems are a good investment only for those who can afford rare, high-priced stones. An ordinary white diamond may retain its intrinsic value over the years, but there is no shortage of supply and no secondary marketplace for them, so it is hard to sell them for anything more than their original wholesale price, he says.

"They are an investment in love and the return is beauty."

© The Globe and Mail

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