Originally published on WealthManagement.com on October 1, 2019
BY: TIMOTHY BARRETT
Trust Counsel, Argent Trust Company | (502) 569-7400
Even for those of us who aren’t car collectors, the appeal of the hobby is easy to understand. Classic car designs are elegant and unique, the culture of collectors seems friendly and inviting—and, of course, there’s the sheer thrill of taking a well-engineered vehicle out on the open road.
Cars are just one of the so-called “luxury assets” that wealthy investors tend to gravitate to—some others are art, wine and rare coins. But cars differ from those other items in a few important ways, some positive (they have a functional use) and some negative (their size makes them costly to store, and they must be maintained to retain their value—another not-insignificant expense).
One unique aspect of car collecting is the devoted community of car owners and admirers who are brought together by shows, parades and other public events. These gatherings at which car aficionados swap auto love stories and nostalgic memories seem rivaled only by, perhaps, gun shows. A car lover who wistfully remembers his old ’55 Chevy never misses a chance to tell tales to a fellow collector who now proudly owns the same model.
As an investment advisor, I have several clients who own luxury cars and think of them as investments. There are certainly some numbers to support that thinking. In 2018, according to the Wall Street Journal, the value of classic cars increased as a whole more than stocks and bonds. Car collectors continue to show up in large numbers to events like the recent Monterey Car Week, where a specially modified 1994 McLaren F1 sold for $19.8 million—not exactly pocket change. As a whole, though, I wouldn’t agree that cars are safe or reliable enough as investments to be considered an important part of an investor’s portfolio.
There are a few reasons why. The first is the value of rare vehicles, which is somewhat emotionally rooted and subject to changing trends. Like any other collectible, a car’s worth is measured by the price a willing buyer would pay a willing seller. Owners who hope their collection will maintain value, or grow much more valuable, face a very real risk that the appeal for those items can wane quickly.
Take, for instance, Hummel ceramics, which in the 1970s sold for $1,500 or more apiece. Today, you can go into a thrift shop and pick them up for a few dollars each. They don’t lack in quality, but they just aren’t that popular anymore because the public has moved on. Ultimately, with any collectible, you have no guarantee that you’ll get your money back or anywhere close—though there’s a chance that you could make a lot of money on the right item.
In addition, the costs of maintaining an automobile are higher than many other collectibles. If a car owner wants to drive their vehicle on the street—which some would say is a large part of its appeal—it must be registered and insured beforehand. Vehicles also require regular upkeep, and they need to be stored out of the elements—meaning that the owner will likely either have to rent a garage or build a custom space. Obviously, if you’re buying a fixer-upper to work on yourself, your costs are going to be much lower than if you’re buying a pristine car that you’ll pay someone else to maintain.
I generally recommend that nontraditional investments not make up a large percentage of your portfolio (in general, no more than 10%). The exact proportion really depends on how much money you have in total and how much money you need. If you own a couple of $250,000 cars that you drive infrequently, and you still have a significant amount of savings beyond that, as your advisor, I probably wouldn’t be too concerned. However, if the majority of your net worth is tied up in cars and you have no income coming in from elsewhere, that might be a different story.
Collectors, especially if they own several vehicles, should have a plan in place to preserve and pass on their collection after their death so that it’s not a burden to their descendants. I’ve advised car enthusiasts who were intent on having their families continue to hold on to their collections. One was thinking about setting up a nonprofit museum that his kids could inherit and run, but hadn’t given much thought to the logistics of how that would work.
The fact is, you can’t control that much from the grave unless your descendants share your passion. If your kids don’t want your cars, you have to give up on the idea that you can force them to continue holding them. And if your descendants try to sell your cars without understanding the market, you should expect that they’re probably not going to go for their full value and may even be liquidated at fire-sale prices. It’s going to be up to the particular local market where you live that sets the price for them.
A smart alternative might be to donate a collectible car to a public charity, such as a museum, or a private foundation strictly for its preservation. The family could retain ownership of the item but lend it under a long-term agreement that specifies the manner, circumstances and length of time it is displayed, stored and lent. There are a few statutory pitfalls in the tax treatment of a donated automobile to a charitable organization involving whether the donee intends to sell the automobile, gift it to a needy family or use it for its own charitable purposes.
In the end, it’s better to view a car collection as a luxury hobby rather than a serious investment with the presumption of any kind of profit. And by thinking ahead about what you’d like to have happen to your collection after you’re no longer around to enjoy it, you can take satisfaction in your passion without leaving a potential burden for the next generation.
Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company, a division of Argent Financial Group.