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Exotic collectibles & risk

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Exotic collectibles are hot – but are they worth the risk?

Is your portfolio full and fairly diversified? Then how about venturing into collectibles? Interesting they may be, but the risks are large, liquidity is low and the spreads can kill you.

A Chinese Song dynasty bowl once used to clean brushes sold for the equivalent of US$26.7-million at an auction in Hong Kong on Wednesday, setting a record for Chinese ceramics, Bloomberg reported.

The 900-year-old item is Ru ware, considered the pinnacle of Chinese ceramics, according to Sotheby’s. The auction house had valued the blue-tinged bowl at US$10-million, but four telephone bidders and two buyers in the room battled for several minutes over the work, pushing it to a record price.

Rarity evidently creates its own beauty, for to the untutored observer the little bowl looks like a slightly used ashtray. Yet Chinese bric-a-brac is not the only thing flying high these days. Collectibles are hot, but chancy.

“You have to know the market and be an expert in the goods. If you are not, you are likely to be had,” explains Caroline Nalbantoglu, president of CNal Financial Planning Inc. in Montreal. “You hear stories of terrific prices on the Antiques Road Show for old things dug out of attics, but those anecdotes don’t reflect the reality that most old things and even most rare things are not worth much and, even when they are valuable, their market is very small.”

The problem is not just rarity. Tastes change so that 19th-century cows painted by a few eminent British specialists in pastoral scenes, in vogue in 1850, considered trivial in 1950, have returned to glamour and high prices today. Paintings by Lucien Freud, grandson of psychoanalyst Sigmund Freud, became high fashion late in his life. He moved from the margins of British painting to the centre before his death last year and saw his paintings of people in all their fleshy glory sell for millions. Like drooping prices for pop art, now passé in some circles, Freud’s prices could also tumble when the taste for flab fades.

Finally, there is the problem of liquidity. If you have a large-cap stock, a conventional mutual fund, or a U.S. or Canadian government bond, you can sell it and get a cheque in not more than three days, which is the standard settlement time for most of these trades. If you want to get good value for your Renoir, if you are lucky enough to have the real thing, you have to go to a dealer, who will take a big discount to cover his risk, to an auction house that may take months to arrange a sale, or try to get a loan from somebody who knows its worth. Collect by all means, but do it for love.