Should You Invest in Watches, Wine, or Other Luxury Goods?

A stainless steel Rolex Daytona currently retails for $17,950. Resellers can get over $30,000 for that same watch, because the demand makes it difficult to get at an authorized dealer. That's a return of over 67% -- something any investor would be happy with.

It's no surprise then that people would become interested in the idea of investing in luxury goods. Hobbyists, and anyone else who sees dollar signs, often ask if they should buy watches, whiskey, handbags, or other high-end items as investments. It's certainly possible to make money this way, but it's not as easy as you might think.

How luxury goods fare as an investment

The Motley Fool recently released research on alternative investments. Thanks to that, and The Wealth Report by Knight Frank, there's information on exactly how much of a return luxury goods have delivered over the last 10 years.

To evaluate these returns, I'll compare them to the S&P 500. This index of 500 of the largest publicly traded companies has a 10-year return of 152.9%. Anyone can invest in it, as there are quite a few S&P 500 mutual funds and exchange-traded funds (ETFs).

There are many types of luxury goods, and they have 10-year returns ranging from 16% to 373%. Only three types of luxury goods outperformed the S&P 500 in terms of 10-year returns:

• Rare whiskey: 373%
• Cars: 185%
• Wine: 162%

Watches also came close, with a 147% return. Everything else had a 10-year return of under 100%, including art (91%), handbags (74%), coins (59%), and jewelry (44%).

Based on those numbers, it may seem like rare whiskey is a home run. Not quite. Returns on luxury goods fluctuate, and what's hot one year may be a dud the next. Even though whiskey was the top performer over the last 10 years, it was the worst performer over the last 12 months, with a return of just 3%. In the last year, art has done the best, with a 29% return.

The pitfalls of investing in luxury goods

We already touched on one of the problems with investing in luxury goods: It's hard to predict what's going to appreciate in value. You're not just picking a type of luxury good either, but a specific item. Some watches and cars skyrocket in value; others don't.

There's also the issue of sourcing items. You're probably not going to find one of those rare whiskeys at your local BevMo. The items that gain the most value are the ones that are most in demand, and they're in demand because they're hard to find. Also keep in mind that counterfeits are common with luxury items, so you need to be careful about what you buy.

Even if you're able to buy a luxury item that's a sound investment, there are other potential hurdles:

• You'll need a way to store it and keep it in pristine condition. This can be difficult, especially with goods that need to be kept within a certain temperature range, like whiskey and wine.
• You'll need insurance to protect your investment. The cost will vary depending on what you're insuring, but 1% to 2% of the value is common.
• You'll need to find a buyer. That may mean going through an online platform that takes a percentage of each sale. If you ship the item, that's an additional cost.

These are all concerns that don't come up with stocks. With any of the top online stock brokers, you can make the investments you want in minutes. You don't need to pay to insure anything. And when you want to sell, you can just place a sell order with your broker. These often process in seconds.

Should you invest in luxury items?

It's possible to make money by investing in luxury goods. But it's unlikely that you'll make more than you would've by just investing in a quality investment fund, such as an S&P 500 ETF. As you saw, most luxury items don't outperform the S&P 500. There are also additional costs involved, including storage, insurance, shipping, and sales fees.

Luxury items are better enjoyed as a hobby than as a money-making endeavor. For your investment portfolio, you're better off sticking to investment funds or individual stocks.