Should You Invest in Collectibles?

Remember the Beanie Baby craze?

It started in the mid-1990s. Ty Inc., the company behind the phenomenon, deliberately limited production of each design. They’d restrict shipments to stores and retire older models and designs. As the toys got to be more popular, a secondary market emerged where people would buy and sell their favorite models.

After a while, this secondary market exploded. People looked at the value of the earliest designs and assumed every model would eventually be worth that much.

The internet helped too. At the height of popularity, people were buying the bears and flipping them on sites like eBay for huge profits. Profits were as high as 1,000%, and eBay reported at its peak Beanie Babies accounted for as much as 10% of its sales. There was even a magazine dedicated to the toys which ran for more than four years.

We all know how it ended. Beanie Babies that traded hands for hundreds of dollars in the late-1990s are barely worth $5 today.

Not just Beanie Babies

Beanie Babies aren’t the only collectable craze that ended up ending badly.

In the early-1990s, it seemed like every sports fan in Canada was collecting hockey cards. The value of cards from the 1950s and 1960s was through the roof. A Bobby Orr rookie card was worth upwards of $2,000. A Wayne Gretzky rookie card was worth $500. For the average kid collecting, that was a powerful incentive to keep your cards in good shape.

To keep up with the demand, card companies flooded the market with product, making sure that every kid who wanted the latest Mario Lemieux or Brett Hull card could have one. Some manufacturers even took it a step further, positioning themselves as the cheapest option for collectors. Since collectors thought every card was poised to be worth a lot of money someday, they bought up these cheap cards like crazy.

Twenty years later, most of those cards aren’t even worth the paper they’re printed on. A select few are worth something, while the others don’t have much use outside of kindling.

In hindsight, it all looks so obvious. Manufacturers react to demand by making more product. The market gets flooded with so much supply it ensures these new cards will never be worth anything. It’s basic economic theory at work.

Do it smart

I paint a pretty bleak picture when it comes to investing in collectables.

It’s difficult because you have to be good at predicting the future, something that eludes most of us. You have to pick something that has limited supply, that will become more popular as time goes on, and that has a market. You could buy the most rare item in the world, but it’ll never be worth anything unless somebody pays for it.

What you want to do is focus on items that definitely will not be made any longer that are somewhat rare. Toys are perhaps the best example of this. Toy manufacturers know a big part of their market is collectors, so they intentionally limit supply.

Your job as an investor in collectables is to figure out what toys will increase in value and which ones don’t have that potential. This involves a lot of close study of the popularity of the toy versus the overall demand of toys of that particular genre.

Take Star Wars. The toys made to accompany the first movie have value because over the years supply dwindled and demand skyrocketed.

It’s not simple enough to buy Star Wars toys today and hold onto them for 30 years. Lots of people do that. You have to figure out which movies will surge in popularity over the next 30 years and then buy the toys now, when they’re cheap.

Good luck with that.

And while you’re at it, watch out for a decline in the whole sector. A perfect example of this is athlete autographs. It used to be a fan would want an autograph as proof they met the athlete. These days it’s all about pictures. People want a picture with their favorite celeb. They don’t want to shell out hundreds of dollars for an autographed piece of equipment.

Just don’t bother

I have a friend who owns a hobby store. He constantly gives out this advice to people who are looking for the next collectable that’ll make them rich.

“Collect something because you like it. That way when it ends up worthless, you won’t be disappointed.”

That’s terrific advice. Since nobody can really predict what’ll be worth money and what won’t be, it’s best to buy collectables because you like them. Don’t treat them as an investment.

Just Say No To Mortgage Life Insurance

When people get a mortgage, it’s often the impetus that motivates them to take a closer look at their whole financial picture.

They’re worried about a few things. They want to make sure they have enough to afford the house as well as a comfortable retirement. Nobody wants to become house poor. And at the same time, they want to make sure their significant other doesn’t get burdened with an unreasonably expensive debt if they accidentally pass away.

The folks setting up the mortgage know this is a perfect time to try and convince a borrower mortgage life insurance is for them. What better time to remind someone about insurance than right after they sign up for a very long-term commitment?

That’s exactly what they’re counting on. Here’s why you need to say no to mortgage life insurance.

Two big issues

The first big problem with mortgage life insurance is how the product is structured.

It’s a pretty simple product. Borrowers take out a policy which automatically pays out the value of the mortgage if they die. It stays in place for as long as the mortgage is in place, usually 25 years. Payments stay the same throughout the mortgage, slowly getting cheaper as inflation erodes the value of a dollar. And they don’t (usually) have to take a medical exam. They just need to answer a few health questions and they’re good to go.

For the insurance company, this is a great deal. What they do is price the policy based on the value of the mortgage. Each month, as the mortgage goes down, their potential liability goes down as well. After a decade or more, the amount insured really takes a hit as the borrower has paid off the mortgage.

By the end of the mortgage, a borrower might be paying $50 per month for only $25,000 or $50,000 in life insurance. That’s a real crummy deal.

Insurance models are pretty simple. Your chances of dying go up as you age. With mortgage life insurance, the amount of insurance outstanding goes down as the chance of dying goes up, while the monthly premium stays the same.

That’s a great product for the insurance company, but no so much for the person paying every month.

The other issue is how the policy is processed when one of the holders dies. Normal life insurance underwrites the policy before it goes into effect. That’s why you have to have a medical exam before the company will insure you.

A typical mortgage life insurance policy is different. They don’t begin to underwrite the policy until after the policyholder dies.

This can create some issues. Remember those simple health questions asked on the mortgage life insurance application form? Once the policyholder dies, the insurance company goes out of their way to prove the applicant wasn’t being truthful.

The most common one is smoking. If the insurance company can prove somebody who said they were a non-smoker lit up recently, it can be enough to deny the payout. The insurer can claim it would have never insured the policyholder if they knew they were a smoker.

I’ve even heard policies be denied because of heartburn. Somebody goes to the doctor because they’re experiencing chest pains that turn out to be a nasty case of heartburn. They tell the mortgage life insurer they haven’t been checked out for heart issues. When the insurance company completes their investigation they deny the claim because perhaps the doctor messed up the heartburn diagnosis.

Now to be clear, my understanding is most of these policies to pay out what’s promised. There’s just a small chance of a payout being rejected. Still, the risk exists.

A better solution

The solution is simple. Just buy a traditional life insurance policy.

A traditional policy will stay constant in value, which protects the borrower better than the declining balance model of a mortgage life insurance policy. And if borrowers are concerned about over insuring themselves after say 15 or 20 years, they can take out a shorter term life insurance policy that covers the riskiest years. They can then choose to go without insurance when the mortgage value goes down, or get a smaller policy.

And a traditional policy will be much more iron-clad. After a medical exam it’s much harder for an insurer to claim they didn’t know about a health issue.

A traditional policy tends to be sold by a life insurance professional who works with dozens of different insurers. Mortgage life insurance policies are sold by loan officers and mortgage brokers. Who would you rather buy insurance from?