Markets
Chart: Investing in the Finer Things in Life
The Finer Investments in Life
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
Outside of the mainstream world of stocks and bonds, there exists an interesting cross-section of alternative assets that only really gain appreciation from a relatively small group of elite investors.
These luxury collectibles – things like fine wine, classic cars, rare stamps, colored diamonds, Chinese ceramics, and fine art – are unquestionably fun to hold as investments and even to talk about. But do these alternative assets also perform as investments over time?
Eye of the Beholder
The obvious challenge with valuing an item like a prized Picasso painting is that beauty is in the eye of the beholder.
Investors can rely on expert opinions, their own experience, historical evidence, and longstanding markets for these asset classes. However, at the end of the day, the price an investor is willing to pay is ultimately subjective, which can get compounded by the fact that these markets also tend to be illiquid.
If you’re buying or selling one of these assets, this can either work in your favor – or you can be stuck with a classic car in your garage that never really panned out in terms of price.
Here is a graph showing the sale dates of some of the most expensive paintings:
Recently, you may remember the sale of Leonardo da Vinci’s re-discovered masterpiece, Salvator Mundi, as an event that topped headlines in late-2017. The painting was bought for $450 million by Abu Dhabi’s department of culture and tourism, and it’s to be displayed in the Abu Dhabi Louvre.
Investments that Age Well
Despite the challenges involved in valuing these assets, as well as other costs such as setting up the storage and security systems needed to protect them, time has been kind to many of these luxury assets.
Here are the returns of luxury items over the last decade, based on the 2018 Wealth Report by Knight Frank:
Ten Year Returns | CAGR | |
---|---|---|
Autos | 334% | 15.8% |
Fine Wine | 192% | 11.3% |
Rare Coins | 182% | 10.9% |
Jewelry | 138% | 9.1% |
Rare Stamps | 103% | 7.4% |
Fine Art | 78% | 5.9% |
Colored Diamonds | 70% | 5.5% |
Watches | 69% | 5.4% |
Chinese Ceramics | -3% | -0.3% |
Furniture | -32% | -3.8% |
Keep in mind these investment categories are pretty narrow – for example, a Toyota Corolla doesn’t count towards the auto category. Instead, we’re talking about cars like the Lancia Aurelia B24 “Spider”, of which only 761 models were made in the 1950s.
In any case, as you can see from the above table, most of these assets have not only continued to hold their value, but they’ve also appreciated in price significantly. Autos topped the list, but fine wine and rare coins (two more accessible options for investors) also did quite well with 11.3% and 10.9% annual gains, respectively.
Correction: A previous version of the graphic showed an incorrect Jean-Michel Basquiat painting.
Markets
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.
According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps. Â
This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.
Higher Historical Returns
If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Starting value (February 1989) | $100 | $100 | $100 |
Ending value (February 2024) | $2,162 | $3,276 | $1,764 |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.
This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.
Small caps also outperformed over this timeframe. They earned 23% more than large caps.Â
Higher Volatility
However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps.Â
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Total Volatility | 18.9% | 17.4% | 14.8% |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.
Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.
Attractive Valuations
Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.
Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point.Â
Small Caps/Large Caps | Mid Caps/Large Caps | |
---|---|---|
Relative Forward P/E Ratios | 0.71 | 0.75 |
Discount | 29% | 25% |
Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.
Discovering Small- and Mid-Cap Stocks
Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.
With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.
Explore more insights from New York Life Investments
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