From antique cars to luxury watches, HNW individuals are taking to hobby investments as a way to combine their interests with alternative investing. When it comes to all things sparkly, however, investors should choose wisely.
Many investors know all too well the impact of volatility on financial performance and as such, seek alternative investments for diversification and potentially stronger returns than traditional assets. Our 2016 Global Wealth Managers Survey shows there is growing interest in alternative investments, as 44% of wealth managers expect demand from HNW investors to increase in the next year.
On the surface, diamonds appear to be an attractive purchase. Unlike stocks, they can be enjoyed as jewelry and do not depreciate with use. Because of their durability they are not sold as ‘second hand.’ And if those weren’t enough reasons, diamonds are also not taxable.
Investing in diamonds, however, is another story.
For one thing, it is difficult to determine the exact price of any given diamond. At a basic level this begins with ‘the four Cs’ (carat weight, clarity, color, and cut) and guides such as The Rapaport Price List. However, there is ample room for interpretation and unless the gem is prized for exceptional rarity and desirability, seeing any return could take over a lifetime.
In fact, the overall value of the gem is failing to improve. The RapNet Diamond Index (RAPI) dropped 2.7% in Q3 2016 and is down 2% since the beginning of the year. Three-carat diamonds have seen a 9.8% decrease from January to October and a 10.6% decrease from October 2015.
Individuals who are keen to invest in diamonds have the option of exchange-traded funds which track the performance of competitors within the diamond industry. For example, the iShares MSCI Global Metals & Mining Producers ETF launched in 2012 and has exposure to diamonds through a holding of Rio Tinto PLC and Anglo American PLC. However, financial performance has been anything but shiny: according to the fund’s website a $10,000 investment at the ETF’s launch in 2012 would return $5,649 as of September 30, 2016.
Shares are perhaps a more viable option. As reported in The Wall Street Journal, investing in a diamond-related company could yield significant returns: a $1,000 investment in Tiffany & Co.’s IPO in 1987 would return around $26,000 in today’s market. However, the future of diamonds is bleak. In The Diamond Insight Report 2016, De Beers lists volatility as one of the industry’s main trends going forward, with the threat of other luxury investments becoming more relevant to consumers.
For investors who seek high returns from diamonds, they will have to wait. But this is not to say that this ‘passion investment’ should be entirely forgotten. As with any long-term investment, patience is key. Those who do decide to investment in diamonds should constitute a small proportion of their portfolio and be prepared to sit on these assets until the market provides an ideal opportunity to sell.
By Nicole Douglas, Wealth Management Analyst