Christiano Ronaldo, Ralph Lauren, and Gordon Ramsay all have a major love for Ferrari. But their Ferrari’s aren’t just for speeding, they’re also a significant part of their investment portfolios.

Traditionally, when people think of investing they think of the sharemarket, ETFs, bonds, or property. 

It’s rare that a Hermès Birkin, a Rolex watch, or a Porsche 911 comes to mind.

But for some people, these luxury products are investments too.

Luxury investing is when people put their money into high-end, exclusive, tangible assets.

Think: collectable art, watches, classic cars, wine, and jewellery.

Investors don’t just expect these items to hold their value over time, but they also expect these items to grow in value.

Can you actually justify buying a rare diamond or a rare bottle of scotch as a good investment? 

Well, for starters, investment returns in the luxury market are more unpredictable than the delivery time on your Temu order. 

For example, while the S&P500 rose 158% over the 10 years between 2013-2023, the rare whiskey market rose 280%.

Meanwhile, the jewellery industry only rose 37%.

So, yes, the returns can be shinier than the crown jewels, but not always as steady as you'd hope, especially when the cost of living starts to squeeze your wallet.

The Knight Frank Luxury Index tracks 10 asset types in the luxury investment market, and while there have been some stand-out returns, the index overall was actually down 1% over 2023.

In spite of this lull in the market, some investors have been able to make some serious dosh in luxury investments.

And with some of these luxury items outperforming the stock market, it’s worth taking a closer look at them.

Case study: The Birkin Bag

The Birkin bag is the flagship product of luxury fashion label, Hermès.

It might look like just any old bag from the outside but these bad boys can range anywhere between $12,000 and well over $200,000 USD.

In fact, the Diamond Himalaya Birkin 30 sold for over $450,000 USD in 2022.

It’s the most expensive handbag ever sold at an auction.

The Birkin’s success comes from the fact that these bags can’t be bought by just a regular person. 

They can only be bought by customers who have a purchase history with the Hermès brand.

This “Hermès Game” creates an aura of exclusivity and makes the bag more desirable, which creates massive demand for them in the second-hand market, where they can go for thousands of dollars higher than the store price of $12,000 USD.

In fact, between 1980 - 2015, the Birkin bag increased at an average annual rate of 14.2%.

This is why, many see the Birkin, not as a piece of leather to stash your sunglasses and wallet in, but as a genuine financial investment.

But the Birkin fanaticism didn’t kick off until the 1990s and 2000s when it was seen on the arms of major celebrities, and famously on Sex and the City. 

A big part of the Birkin’s investment value comes from the hype it has garnered over the last couple of decades. 

But price increases depend on trend cycles, which can change rapidly, so while there can be massive payoffs in this sort of investment, it can also be a major gamble.

Case study: Ferrari

When you think of luxury cars, Ferrari is probably the first brand that comes to mind. 

Ferrari’s business model centres on producing a very tiny volume of cars - around 13,500 cars yearly.

For context, Porsche produced more cars in 2023 than Ferrari has done in its lifetime.

Ferrari wants to carefully monitor its supply comparative to demand. 

About 7% of Ferrari’s production volume is of its limited edition cars - these are the ones that tend to be the investment vehicles.

While a regular Ferrari might sell for on average $250,000 USD, a limited edition Ferrari can sell for upwards of $2 million USD.

But similar to Hermès, for someone to invest in a Ferrari limited edition car, they need to be ‘invited’ by Ferrari to buy one.

That often means they need to have owned a few Ferrari’s, and have an established relationship with the brand. 

And if that relationship sours, Ferrari could even blacklist you from its invite list - just ask Tyga or Justin Bieber!

And unlike an everyday car brand like a Toyota or Mazda, which would lose 10-15% of its value the moment you drive it out of the showroom, a limited edition Ferrari would jump in value the second it’s been sold.

What to think about before investing in luxury items

The growth in luxury investments can be tempting. 

As an example, from August 2018 to January 2023, the average prices in the second-hand market for top luxury watch brands (Rolex, Audemars Piguet, and Patek Phiippe) increased at an annual rate of 20%.

The S&P500 in comparison rose at an annual rate of 8%.

But, investing in these types of assets isn’t for everyone.

It requires a large sum up front and a deep interest in niches.

There’s also no guaranteed return, which can be a major gamble.

While shares on the stock market or property can be valued by looking at a number of different data points, luxury items have far less data and no ongoing income to determine their worth.

That’s why investing in luxury items isn’t really a recommended way of building wealth unless you’re someone with a deep passion in a particular niche - and want to be super involved with your investments.

Whether it be wine, art pieces, watches, or handbags, you need to have knowledge that others out there don’t to profit from these investments.

That’s a big distinction from traditional investments like ETFs where there is a much lower barrier to entry, and not as big of a learning curve.