Characteristics of Major Investment Types

Each type of investment has three investment characteristics: rate of return ("return"); variability of return ("risk"); and liquidity.

Investment Returns

The return is the annualized return expected over the long term from holding an asset class. The expected return is based on the historical average annual total return of that asset class. If the expected return on collectibles, say vintage clothing, is 11%/year, a collector holding a representative selection of vintage clothing, bought at fair market prices, has a reasonable expectation of achieving a return of about 11%/year over the next several years. The reasonable premise is that past returns approximate future returns.

Since collectibles do not pay dividends or interest to the collector, a return of 11%/year will come entirely in the form of price appreciation. In contrast, stocks and bonds achieve their total return partly from current income and partly from appreciation.

Historical returns, and presumably future returns, for the major asset classes vary widely. For the 33-year period 1968-2001, here are the average annual returns: common stocks, 12.2%; collectibles, 11.2%; intermediate-term Government bonds, 8.5%; Treasury bills, 6.7%; inflation, 5.1%.

asset class returns

Investment Risk

The variability of annual returns is the second most important investment characteristic. If our purview were limited to returns, we would see a limited and even misleading picture. Annual returns fluctuate widely for some investments, e.g., stocks, but fluctuate hardly at all for other investments like Treasury Bills.

A pool of water with average depth of three feet is not safe for the non-swimmer, who can drown in the deepest part at 12 feet. Likewise, stocks' impressive average annual return of 12.2% smoothes out, and indeed conceals, the extreme variability of returns from the stock market. It is the negative variability of returns ("risk"), the downside, that matters to the investor. Large positive returns are not a problem, but large declines in value can be very dangerous to the investor's financial health, if she needs to sell during such a downdraft. Clearly, historical risk is an important factor to consider for any asset class.

In the period 1968-2001, seven (21%) of the annual returns for stocks were negative. For the period 1973-1974, the total cumulative return was –37%. In contrast, collectibles had only four down years; there were no back-to-back declines. The worst annual return was –8.4% in 1975. Treasury Bills were the least risky asset class. There were no negative years and little variability of return around the 5.1% average.


The final investment characteristic is liquidity. It measures the difficulty of buying (or selling) without moving the price against the initiator of the transaction. If today you decide to sell stocks or Treasury Bills or vintage clothing, in each case how much will you realize, compared to the latest quote or fair market appraisal? The closer your realized amount is to the latest valuation, the better the liquidity.

On a scale of 0-100 with 100 the most liquid (most favorable case) and 0 the least liquid, Treasury Bills would have a liquidity quotient of 99; stocks might be 70. The internet together with eBay have greatly improved the liquidity of collectibles. Even so, vintage clothing might rate 50 on the liquidity scale.

Financial liquidity is paradoxically at once the most important and least important investment characteristic. Liquidity has the same relative importance as does water in a normal diet. If you have enough food and water, you need not concern yourself with how much water is available. But if you find yourself short of water in the desert, then H2O must be your paramount concern.

The investor should keep a reasonable liquidity reserve of near-cash, like Treasury Bills, bank deposits, or intermediate-term bonds. Being liquid, these assets by definition can be easily converted to cash with very little loss of principal. What size reserve is reasonable? If the investor has family income to cover annual living costs, then the reserve can be a small percentage of total assets.

Once the investor has taken this cautionary step, liquidity becomes a relatively unimportant factor. In that case, the investor will have the flexibility to invest in a less liquid asset class, like collectibles, and reap the benefit of collectibles' other favorable investment characteristics: high return and modest risk.

The Equilibrium of Investment Characteristics

The investment world prices various investment classes rather efficiently. In the table below, I use a scale of 0-100 to represent the relative value of the investment characteristics of three asset classes (stocks, T-Bills,collectibles). Higher numbers indicate more favorable characteristics; lower numbers indicate less favorable characteristics. Stocks offer high returns(75) balanced by significant risk (40) and good liquidity (70). Treasury Bills offer very low returns (30) but compensate with insignificant risk (95) and very high liquidity (99).

Collectibles provide a dramatic illustration of the principle of compensating investment characteristics. Among these asset classes, collectibles are the least liquid (50), but they return almost as much (70) as stocks (75) and have lower risk (70). Thus, vintage clothing must compensate the vintage clothing collector/investor for lower liquidity. This is how the investment universe maintains a dynamic equilibrium among the desirable and undesirable investment characteristics for various asset classes.

Relative Value of Investment Characteristics

Stocks T-Bills Collectibles
Return 75 30 70
Risk 40 95 70
Liquidity 70 99 50
(Scale = 0-100 with 100 the most favorable and 0 the least favorable.)

investment characteristic values

Vintage Clothing

To criticize vintage clothing as a less liquid asset class is like criticizing a perfect apple for not tasting like an orange. If, however, a collection is slowly put together with loving care, and eventually sold off in the same manner, then the liquidity concern disappears.

The collector's mindset is ideal for a less liquid investment like vintage clothing, because the true collector is the ultimate long-term holder. Time works for her, not against her, since she can afford to wait months or years, if necessary, until the market is right. She will sell, if at all, when the market is strong, not when she has to sell.

Another attractive investment feature of collectibles is that their returns have low or negative correlation with those of financial assets (stocks and bonds). When inflation is strong, financial assets do poorly, while your collection of gold, silver, or vintage clothing should appreciate smartly.

The discriminating collector-connoisseur of vintage clothing will enjoy the pleasure of building and holding her collection. If she chooses quality and value, she can be confident that the market will also do its work and provide a handsome financial return in the fullness of time.

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