Passion investing refers to investing in alternative assets like collectibles, fine art, classic cars, wine, etc. that investors feel emotionally connected to. As the number of high net worth individuals (HNWIs) has grown significantly in recent years, their interest and allocations to these passion investments have also increased. Experts estimate nearly 10% of HNWI’s $63 trillion wealth is currently invested in passion assets. Though returns are hard to realize and costs are high, passion investments can help diversify a portfolio. This article provides an overview of passion investing, its growth, performance relative to stocks, challenges, and tips for HNWIs to leverage their emotional connection to certain assets into potential investment opportunities.
Passion assets provide good returns but lag stocks recently
The Economist’s passion investment index, weighted by HNWI holdings, has returned 5.9% annually since 2007, outperforming the MSCI World global stock index. However, over the past three years, the passion index returned -2% annually versus ~8% for MSCI World stocks. So stocks have done better lately, though passion investments showed resilience during the 2008 crisis. Additionally, collectibles supply is limited while demand grows with more HNWIs. So experts predict passion investments will continue providing good long term returns for patient investors.
Realizing returns is challenging due to low liquidity & high costs
A key downside of passion assets is they are much less liquid than stocks, except wine. Additionally, they often can’t be interchanged, so selling them quickly leads to large losses, especially in times of financial distress. Passion investing also carries high insurance, storage, maintenance and transaction costs that reduce net returns. For example, auction reserve pricing often inflates sale prices. However, losses from private sales go unreported. And settlement can’t be done in crypto.
Leverage emotional connection but invest prudently
HNWIs should carefully evaluate their emotional connection to certain collectibles and tap that passion for potential investment opportunities. However, reason must temper emotion given challenges realizing returns. Thorough due diligence assessing supply/demand dynamics, expected costs, etc. is vital. Appropriate diversification and position sizing are also critical – passion assets should likely represent less than 10% of a portfolio. Patience is key as these are long-term investments. With prudent passion investing, HNWIs can create a differentiated portfolio that reflects their values and interests.
In recent years HNWIs have increasingly invested over $6 trillion collectively in passion assets like collectibles, art, wine, cars etc. that they feel connected to. Though these assets have provided good historical returns, realizing gains is challenging due to high costs and low liquidity. However, with careful due diligence and prudent position sizing, passion investments offer an opportunity for HNWIs to tap their emotional connection to certain assets and differentiate their portfolios in a responsible manner.