Alternative Assets: A Quick Guide to Investing in Diamonds
The past few years have been the opposite of “business as usual.” For the better part of two years, the pandemic ground the entire economy to a halt. Due to this, millions of people temporarily or permanently lost their jobs. In response, the government printed trillions of dollars in stimulus payments. For a while, it seems like each major announcement sends shockwaves through the stock market. If you are a very risk-averse investor, this type of economy is a living hell. Due to record volatility in the stock market, lots of investors are starting to look at alternative investments. Specifically, there is a high interest in investing in diamonds.
Many people own maybe one or two diamonds. Usually, people buy them as a gift for someone special. But do investors actually consider them a legitimate way to store money? Let’s take a quick look at a guide to investing in diamonds.
What’s The Point Of Investing In Diamonds?
Diversification: Practically every investor knows the importance of diversifying their portfolio. Honestly, this is probably the first thing that every investor learns. 99.99% of financial advisors will tell you that diversification is key to protecting your money. For example, let’s say that you only own one stock. If that stock drops 50%, you’ve just lost 50% of all your money. This could wipe out years of hard work in a matter of minutes. On the other hand, owning twenty stocks is a much safer strategy. Even if one stock falls in value there’s a good chance the other nineteen will perform well. This gives you a much better chance of coming out on top.
But what about times like March 2020? In a matter of weeks, the entire market dropped approximately 30%. It doesn’t matter how many stocks you own if the entire market is down. This is why some investors turn to alternative assets.
Alternative assets are things that have value but are not traditional investments. Traditional investments are things like stocks and bonds. Alternative assets can be just about anything that people find valuable. A few examples are things like commodities, collectibles, classic cars, cryptocurrency, NFTs and gemstones. Let’s examine a few pros and cons of buying gemstones. Specifically, investing in diamonds.
Pros Of Investing
- Diamonds have high intrinsic value. If you’ve bought a diamond before, you already know that they’re very pricy. Lots of people want them, but there is a limited supply. There is also no terminal market or open diamond exchange. This makes it difficult to resell them. All of this creates a high price.
- They are almost always in demand. This means that there is a very low chance of your diamonds becoming less valuable. Over time, diamonds always tend to rise in value.
- They last forever. Diamonds are the hardest substance in the world. This means you don’t need to worry about accidentally breaking them. You also don’t really need to pay for maintenance or upkeep.
- They’re an asset you can flaunt. You can’t wear your stock portfolio out to a nice restaurant. But, you can wear diamonds.
- You can insure diamonds. This adds an extra level of security to your investment.
- They’re small. This means that they are easily transported and stored.
- They provide psychological security. Unlike a stock, diamonds are tangible. You can hold them in your hand or put them under lock and key. Wall Street, the Federal Reserve, and the government can’t really influence diamond prices. You also don’t have to worry about a tropical storm or earthquake destroying them.
- They protect you from inflation. Speaking of the government, diamonds are considered an inflation hedge. This means that their prices rise along with (and even outpace) the rate of inflation.
With that said, let’s examine a few of the downsides to investing in diamonds.
Cons Of Investing
- Diamonds are difficult to value. Investors measure some assets like gold based on their weight and purity. One ounce of gold is basically the same as any other ounce. This makes it easy to assign a dollar value to an investment in gold. Diamond prices, on the other hand, vary based on four different factors. Diamonds are priced based on their carat weight, color, cut and clarity. With so many different factors, it’s easy to overpay. This is especially true if you’re new to investing in diamonds.
- Buying diamonds is expensive. Obviously, the diamond itself is expensive. On top of that, you will have to pay tax on your purchase. You’ll also pay the retailer a small markup. If you want to buy insurance, that’s another cost to consider. These added purchase costs can erode diamonds investment potential.
- You’ll have to store them manually. If you store your diamonds in your house, you run the risk of being robbed. You can also go with a safe deposit box. However, this is another added expense.
- They increase in value very slowly. Don’t be surprised if it takes a few years for your diamonds to increase in value. Although they do tend to rise in value, this process can take years. If you have to sell your diamonds in the short term, you’ll probably receive less than you paid. This is because of the added purchase costs mentioned above.
Diamonds have low liquidity. Unlike a stock, it’s difficult to sell your diamonds once you have purchased them.
Diamonds vs. Gold
There are a lot of similarities when it comes to investing in diamonds vs. gold. Both are considered alternative assets. They are also both considered a safe, reliable place to store your money.
Here are a few more similarities:
- You need to store them securely.
- People use them for jewelry in addition to being an asset.
- Investors view both assets as safer than stocks.
- Investors use them to hedge against inflation.
- Their value generally increases over time.
- The market for investing in gold is much bigger.
- Gold is a much more common investment.
- Gold is much easier to assign a price to.
By this point, you probably have a good idea of whether or not investing in diamonds is right for you. If it is, let’s talk about how you can get started.
Getting Started Investing In Diamonds
As with any investment, the first place to start is with your financial goals. Before investing in diamonds, determine what your financial goals are. If you are looking for a safe, long-term place to invest your money then diamonds could be right for you. If you are hoping to grow your money quickly then diamonds are probably not your best bet.
As far as actually buying diamonds, I would recommend finding a trusted professional. As mentioned, diamonds are very hard to value. This means that you will need a professional opinion to guide your purchase. While doing this, remember to gather several different opinions before making a purchase. This way you will ensure that you are getting the best price possible for your diamonds.
I hope that you’ve found this article valuable when it comes to learning about investing in diamonds! As usual, please base all investment decisions on your own due diligence and risk tolerance.