The impact of rising interest rates on capital management
Boosibri
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Has the rise in interest rates caused you to reduce your collection or alter your inventory management for dealers?
Considering the cost of capital at a minimum 5%, a $1M collection/inventory must cover $50k a year in lost income with margin from sales or nominal appreciation of the assets.
For a dealer, do you look to hold less inventory and turn your inventory faster by altering your margin expectations or which coins you choose to stock?
Me personally, I sold every coin which was not going to be a part of my core in the current horizon, letting go of some great coins in the process for strong returns. I’ll continue to pay up for great coins that fit my core set, but will remain a bit more disciplined and focused.
Curious your views and if anything changes for you?
Comments
This is not exactly the answer you are looking for (and I'm not a dealer) but...
I manage investments for a living. The rise in interest rates, along with other factors, has positively impacted my income and, therefore, my discretionary spending budget. Thus, I have been buying more coins.
The opportunity cost of owning coins instead of income producing investments with my discretionary income is not a consideration at all. That just goes back to the same old hobby vs investment conversation which is boring and predictable at this point.
I never like to have the value of my coin inventory or collection become too high. This is because of the very opportunity cost to which you refer.
That is also why I'm always suggesting that people consider the "investment value" of their collections to be zero. It is a discretionary expense and should be looked at that way. Otherwise, it's too easy to get eaten up by worry if the coin market is flat or dropping.
Interest rates (at least on CDs/money market accounts) have come down over the last 6 months. And I'd expect them to fall a bit more over 2025. They are still higher than we saw for a decade so I can see some people wanting the safer bet vs carrying risky inventory. However, even at 5% interest and with small margins on coins, I would think many dealers think they can do better than that (not everyone will of course). And even with margins being smaller, enough turnover throughout a year with solid inventory would still be more tempting than just sitting on the cash.
Not providing advice just my views…
Capital management also involves capital preservation. I see different strategies for percentages of capital that is designed for different economic outcomes. And preservation of capital should be part of the plan with some recognition that will not likely produce the same Investment return.
Part of the equation is not just the cost of holding but calculating what that real cost is based on inflation and regional economic trends in general. There will always be lost opportunities that simply were either overlooked or just not anticipated. Is there a monetary value of personal time that is comparable to the time value of money? I suspect most would answer that there is which partly turns back to how opportunities are lost.
Nothing for me has really changed in terms of my approach but I recognize that my approach is guided by a discipline that is different… Sort of like buying a straw Panama hat in January that would make Sam Snead envious.
Experience the World through Numismatics...it's more than you can imagine.
Short answer—no. As a collector, I manage my collection size by estimated value as a % of net worth.
5% cost of capital, but (official) inflation is still 2.5%, and IMO heading higher—I like hard assets over a savings account in that environment. Precious metals appreciation last year more than covered any numismatic holding costs for me.
If I were a dealer, there’s a bit more pressure if I were holding seven figures of inventory, but I could see valid arguments for both strategies. On one hand, increasing margins and on the other, increasing turnover at lower margins.
It’s an interesting question.
Nothing is as expensive as free money.
I disagree, but I can understand why this might be good advice for many people.
Nothing is as expensive as free money.
I don't think you completely disagree as you did say you manage your collection as a % of total net worth.
It also really depends on the type of coins. Largely bullion pieces are somewhat different than, for example, civil war tokens. But even then most advisors recommend precious metals as no more than 5 to 10% of net worth.
The coin market has been pretty good for 20 years. If it has a rough patch for 5 or 10 years, I think you'll see a very different attitude on the forum.
Yes, but I account for the value as an alternative asset class, not write it down to $0. If the percentage of NW rises or declines, it’s a signal for me to buy/hold/sell (whether I do so or not also has other factors).
Most definitely. The crypto bros call that FUD—fear, uncertainty & doubt. It’s been interesting to watch the pendulum swinging back and forth for Bitcoin, etc.
Nothing is as expensive as free money.
Yes BTC is a tough market to just hang around in unless you were in very early and sitting on house money.
Since I’m nearing retirement , my kids have zero interest in coins and gold has appreciated so dramatically , I decided to sell the majority of my coins last year (kept a few favorites and my Carr collection ). The proceeds went into the stock market and municipal bonds .
Interest rates have not risen enough for me to factor in opportunity costs but have risen enough to move money from lower fixed rate investments to higher ones.
As a collector with a small percentage of my net wealth in coins I really don’t care what interest rates are from a coin perspective. It makes no difference to me if they’re 3% or 7%. I don’t finance coins and I buy coins with discretionary funds.
Not speaking of you personally, just making the point here…anyone with a funds in coins and debt in any form is in effect financing their collection. I certainly am if you look at it that way, and like many, my locked in cost of debt is less than 3%.
If for some reason I had to move and buy a new, bigger house, I would certainly look at the value of my collection more critically against the increased cost of debt that I was taking on.
Latin American Collection
Tough decision! I've always been a collector (of many things) which I have bought and sold. Coins will be my last collection as I believe it is the most liquid of all collectables. I'm still buying; but, only when I feel the price is advantageous. And I am limiting myself to leaving just one safe deposit box (along with instructions) for my heirs.
recently, i have been reducing the amount of coins i curate and keeping my amount "invested" in coins constant. my goal is to reach 20 coins. i guess this has really nothing to do with your topic. carry on.
Well, yes, I'm trying to bring down my inventory due to increased carrying costs, but I'm not sure it's completely rational. Which I say because the inflation which causes higher interest rates also drives the coin market and inventory values higher. Of course it's not quite that simple, and every coin and deal has to be evaluated on its own merits.
Doggedly collecting coins of the Central American Republic.
Visit the Society of US Pattern Collectors at USPatterns.com.
I’m just a collector and don’t interest rates aren’t affecting my collecting. They might, if I had to buy a new house at today’s interest rates, but that’s a budget issue, not a holding/opportunity cost issue. Move sold more CDs in the last few years than I care to do in the remaining entirety of my career.
The strategies of the businesses that have bought them have been more about waiting for a great deal on their enterprises than keeping money on the sidelines that would otherwise be invested in their inventory or other part of their business.
5% with no risk is nice if you’re waiting for something, but shouldn’t be a big deal if, say, your inventory is turning. If you profit 5% on every coin (no idea if that’s reasonable) and can turn inventory 4 times a year (again, no idea), you’re way better off having the inventory.
If your inventory only turns once a year and you can get 5% risk free and with no effort, then that’s a no brainer.
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Anyone with funds in coins is making a tradeoff, whether they have debt or not. A coin collection could be sold and invested in T-Bonds at 5% instead.
The first question is whether higher rates reflect higher inflation or higher real rates. TIPS (Treasury Inflation Protection Securities) say it is higher real rates, but that does require belief in the official inflation statistics, which many here would dispute.
Ultimately coins aren't the best investment, due to the lack of income, but they aren't the worst, either, as scarce hard assets.
One thing to keep in mind is that dealers are more immediately hit by higher financing costs. This affects collectors who need to sell; it is hard to get paid quickly on a large collection because most dealers prefer consignments or distressed sales over market value sales. The turnaround time on a collection sale can be long unless you accept significant losses. While coins are liquid, rare coins aren't liquid enough for emergency funds.
The best approach is to buy coins because they are fun and not worry about money too much; the fact that coins mostly hold their value means you can put a higher percent of net worth in, whether that is 5%, 10%, or 25%.
I think this is correct and reasonable. But that's where "collection" is different than "inventory". Does anyone turn their collection 4x per year?
I think the opportunity costs are often ignored by collectors. That's fine. But I do think they should be consciously ignoring it. People think they did well, for example, if they bought a coin for $500 and sold it for $800 ten years later. But $500 in an S&P500 fund would be more like $1200. That coin only yielded 5%. And that was a "winner".
Yes, happiness, pride of ownership, etc. But that's where the percent of your net worth becomes with considering. If your collection is 5% of your net worth, who cares? Have fun. If your collection is 50% of your net worth, then you really should consider the opportunity cost.
There was an older gentleman who came into a friend's shop. He had been building 4 collections for his 4 children. He was now selling because he needed money for medicine. He didn't have any significant cash assets but had tied up several thousand in coins. There are a lot of people like this. And they really should not be buying coins and putting them away.
I also see this a lot with some stackers. They come in every week or two and buy a few ounces. [Paying 8% sales tax in NY, by the way. ] then when they need a car repair or something, they come in and sell it, probably for less than they paid for it. Why? Because they are incapable of having discipline with cash. They should build an emergency fund before buying coins. But they can't. And so they make horrible financial decisions because they don't consider opportunity costs.
One last story...
I have a friend who sold his comic collection starting about 15 years ago. He put the cash in a safe in his house. He now has $225,000 in the safe. It started with tax avoidance but he's also one of those people who doesn't trust banks. [FYI, it's about 1/3 of his net worth. ]
I found out about this a couple weeks ago. I told him he should put it in a balanced index or some other fund. He said, "what does it matter? It would take forever to make any money. How much would i make in a year?"
I said, "on average, 20-25,000 per year."
He said, "What?"
He moved $100k into a balanced fund the next day. He had just never done the math. And by the time I did the compounding for him, he realized he had thrown away as much as $500,000 by holding cash.
The same would be true if he had a $200k coin collection that wasn't appreciating at 5 or 10% per year.
Thanks @jmlanzaf...
I always appreciate your financial Insite. The whole discussion makes one think about the holding costs of a collection.
NorthStar
This is why I always say that a hobby is not an investment. As interest rates and dividend yields normalize from the last 15 years of the Post-Financial Crisis....it's tough to match returns with investments that throw off cash.
However, to each his own. Most of you know lots more about coins than me, so if it works for you, mazel tov !!
the current higher level of interest rates over the last few years coupled with the higher prices has me pushed me to sell some of my coins in favor of liquidity. I am still buying but much more selectively. Previously, I would use my HELCO to tap liquidity on a short term basis before when interest rates were very low to buy coins. Now, there is no way I will do that.
So, yes in the end higher interest rates have changed how I buy and sell but it is not the only factor. It's a multi-factor equation.
I think about this regardless of interest rates.
I have a watch collection well into the 6 figures. I LOVE my watches but thinking about the insane amount of future money their ownership is costing me is stressful and I've started to pare it down to a level I'm a lot more comfortable with. The insurance alone on the one I just sold was $900 per year
Same goes for coins. I'm down to just 5 gold coins that have the eye appeal I love and that scratches the itch well enough for me as a collector. I still am on the lookout quite actively to add similar gold coins and very long term hope to have a matching nice 12 coin type set. I'm just insanely selective with what I actually pull the trigger on now.
Lots of good points and advice made by all here in this thread. I tell my kids and young people that they need to plan and invest in their retirement by the time they are thirty. And for most, this doesn't include purchasing coins of value or stacking. Thirty to forty years of compounding will make your later years in life more enjoyable and livable. The same goes for paying interest. It stinks for sure. Take a home mortgage for instance. I know some close friends and some family that thought it was a "status thing' to have your mortgage paid off in ten to fifteen years. And they lost their tax write-off as well. I opted to keep mine on the books and both my wife and I maxed out our 401K's.
We have been debt free for almost eight years. I'm not saying give up on collecting as much as I'm saying look out for yourself thirty to forty years from now.
Dealers can always recoup paying interest on their inventory by passing it along to the collector, as long as their purchased coins appreciate in value. Yes, higher interest means smaller margins.
One of the simple statements that has stuck with me for 30+ years cane from a retirement rep at my brother's company. He told the new employees: if you max out your 401k (it was $10k at the time) for 10 years and stop donating and the person next to you waits 10 years and then maxed out for the rest of their life, they never catch up to you.
Time and compounding are not to be underestimated. If you want a silly illustration. If your grandpa hid a circ $20 gold piece in a drawer in 1933 and you inherited it today, you'd have $2700. If he sold that coin and put $20 in a dividend invested S&P500 fund, you'd have $420,000 today.
[Yes, I know there was no index funds at the time. ]
Great examples you mention. Sadly, most young families cannot afford to contribute or even make the maximum yearly contribution. When a person is buried in debt and paying high interest, it’s difficult to contribute to a 401K or purchase company stock. I always tell people to at least make the company’s match and take your employers match money. You would be surprised at the number of employees that aren’t taking advantage of the free money.