Your client is seeking to diversify beyond the traditional investing world of stocks and bonds. He is considering investing in jewelry, specifically diamonds. Is this a good idea?
Your client is smart. He eliminated investing in fine watches because it’s too complicated. He eliminated colored precious stones, like emeralds, rubies, and sapphires, because they might be synthetic, grown in a lab, or treated to conceal flaws.
He decided to focus on diamonds.
Are Diamonds a Good Investment?
Diamonds have a reputation that precedes them. They have been part of the popular culture ever since Archduke Maximilian of Austria commissioned a diamond engagement ring for Mary of Burgundy in 1477. A tradition was born. In 1953, Marilyn Monroe sang “Diamonds Are a Girl’s Best Friend.”
What is considered an investment-grade diamond? In the antiques business, a chip on a porcelain vase reduces the value substantially. In the world of diamonds, absolute perfection is the goal. Anything short of perfect has a substantially lower value.
According to a Town and Country article, only certain stones are considered an asset class. “White diamonds that are over five carats that are D flawless or internally flawless” are ideal. The article also mentions “fancy vivid pink or blue diamonds that are more than three carats and show straight color and no modifications.” Let’s also include “vivid yellow diamonds over 10 carats.”
If your client is investing in diamonds, the range of options is very limited.
What Are the Pros?
1. Hedge against inflation. Traditionally, hard assets like gold have been thought to hold their value when inflation erodes the value of savings.
2. Portable wealth. You can take it with you – or at least maintain possession. It’s not a balance held at a bank or figures on a brokerage account statement.
3. Enjoyment. You can wear fine jewelry on special occasions, then lock it up again.
4. Certification. Everyone knows about “the four C’s”: cut, color, clarity, and carat weight. These can be measured. There are many labs that provide this service. The Gemological Institute of America, American Gem Society, and the European Gemological Laboratory are a few examples. Many labs exist worldwide. Some are better regarded than others.
5. Potential investment return. A 2013 Fox Business article referenced a Bain Capital report indicating in the 2010-11 period, prices for rough diamonds increased 31 percent and polished stones 24 percent.
What Are the Cons?
1. Markups. Retail jewelers mark up diamond engagement rings 300 percent to 1,000 percent. (Anecdotally, the number I’ve heard is a 400 percent markup.)
2. Insurance appraisals are not certifications. You’ve heard or read the ads. How could something appraise for more than the customer just paid?
3. Synthetics. People sometimes buy laboratory-made stones or synthetics. It’s not the same as the real gemstone when it comes to value.
4. Enhancements. Cracks can be filled. Stones can be irradiated. They may look perfect, but they are not.
5. Insurance costs. If you really consider your jewelry an investment, you want it properly insured. This costs money. The insurance company will likely want super-valuable jewelry stored securely.
6. No dividends. Unlike dividend-paying stocks or interest-paying bonds, you don’t collect anything while you are holding your gemstones. Your return comes when you sell.
You might be asking yourself two questions:
1. My client base is primarily millennials. Do they buy jewelry?
Answer: Yes. According to a Forbes article, “De Beers reported millennials spent nearly $26 billion on diamond jewelry in 2015, more than any other generation.”
2. My client base consists of baby boomers. My practice isn’t in New York, Miami, or Los Angeles. Are my clients seriously considering buying jewelry?
Answer: Yes. The Bureau of Labor Statistics profiled the biggest spender on jewelry in 2013 as “a married person between the ages of 55 and 64 years old who lives in an urban area in the Midwest with a population of 1 million to 2.5 million. This person has a bachelor’s degree, works as a manager or professional, has a spouse who also works, and their joint annual income is $150,000 or higher.”
In closing, your client is a sophisticated investor. It’s important he realizes the gemstone and jewelry business is an opaque market. He needs to understand the importance of certification and the costs involved when he buys or sells at auction. You can demonstrate the value you bring to the relationship by bringing these issues to his attention.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.