Look, we’ve all been there or seen that guy. You know him. Probably wearing jean-shorts and an old polo shirt, maybe a beer in one hand. He says that whatever he’s got will be worth twice as much in a few years. There is a problem though, it won’t be.
Investments Vs Speculations
Many people see cars as investments of some sort. This is reasonable, collectible cars do tend to appreciate. The problem though, is that it is not technically an investment, because (PAY ATTENTION) the value of an automobile is determined by supply and demand. This means that it is not an investment, it is a “speculation.”
“But Jake?” you ask “If you make money off it, who cares what it’s called?” You're right of course, but this is only the beginning of my argument. Whether we're talking about speculation or investment, we must also discuss risk and return.
Risk and return
With an investment, you are taking on a measurable amount of risk, and your rate of return is proportional to that risk. With a speculation, such as a classic car, the risk is much higher, because of how fickle people tend to be about which cars they like. Your return, of course, is also highly erratic.
“But Jake,” you interrupt again, “So is the stock market.”
You’re right, but you’re also forgetting something. The risk of investing in the stock market can be reduced through diversification. With a car, diversification is impossible, considering you probably only have one classic car (The Jay leno’s and Jerry Seinfeld’s of the world not withstanding). You are putting all your eggs in one basket, which is like only buying stock is one company, risky.
An example for you:
Let’s stop for a second though, because everything I’ve written so far has been in the abstract. I want to do a comparison between, say, a 1964 & 1/2 Mustang and a retirement account.
An original Mustang, with all the options, went for about $4,567 when new. Nice examples these days could hit $30k. Yes, that 6 times the number of dollars, but you’re forgetting something, the specter of death: inflation. You see, $4,500 in 1964 is equivalent to about $35,000 in 2016. So you’ve lost $5,000. And you haven’t taken into account all the money you’ve spent to keep the car in good condition either.
Now let’s say you put $4,567 into a 401k with a 6% interest rate in 1964. The number of dollars in your account today: $179,432, a gain of $144,073. Your retirement account outpaces inflation, your classic car does not.
There is a little more nuance to this though. Take an air-cooled Porsche for example. My freshman year of high-school, they were just another classic car. By my senior year, they had reached stratospheric values. In that case, yes, you have made money, because your return did outpace inflation.
So now what?
But what if you’re a Mustang owner? Well, you could sell your car and cut your losses. That doesn’t sound like much fun though. I say get your money’s worth out of it. Do the burnouts you’ve always wanted to do! Drive like you’ve never driven before! Engine swap it! Do whatever you want, you don’t have to care about preservation anymore! The open road is calling, answer it, and be free!
Or maybe hang on a little longer, you never know…
You know you want to...