As traditional markets face increased risk, savvy investors are turning their attention to an unusual asset class: luxury watches. No longer just status symbols adorning the wrists of the well-heeled, these timepieces are emerging as a robust vehicle for portfolio diversification.
With the secondary market booming and brands like Audemars Piguet and Patek Philippe garnering returns that outpace those on the financial markets, could luxury watches be the next frontier for (ultra) high-net-worth individuals?
Looking to make a stable investment? It might be already on your wrist. A recent study that we performed examines the investment performance of luxury watches, revealing interesting insights into their risk-return characteristics and their role in portfolio diversification. This article explores the key findings from the study and contextualises them within the broader market dynamics of luxury watch investments.
The global market for luxury watches has expanded significantly, with the secondary market now valued at approximately USD 24 billion (Dupreelle et al., 2023). Indeed, one-third of luxury watches are bought and sold second-hand. This growth has been fuelled by increased demand for collectable timepieces and limited production and, thus, limited availability through authorised retailers on the primary market. For example, collectors may have to wait up to five years to obtain certain Rolex models. This makes the secondary market an increasingly important avenue for investors and collectors alike.
We focus on the investment performance of 13 of the most frequently traded luxury watch brands over the period from January 2019 to September 2024, using indices provided by Chrono24, a leading online marketplace for pre-owned luxury watches. The analysis reveals that while luxury watches generally offer lower returns compared to stocks, their lower risk profile and weak correlation with the stock market make them attractive for risk-averse investors seeking diversification. In short, watches are largely immune to stock market turbulence. However, the luxury watch market also appears segmented with different brands faring very distinctively across various financial indicators.
Luxury watches, as a whole, showed an annual return of 5.68%, underperforming U.S. stocks (12.85%) and gold (13.06%), but outperforming fixed income (negative returns) and real estate (3.14%).
Figure 1: Evolution of asset classes
Indeed, the volatility of the luxury watch market was notably lower compared to stocks. This lower risk indicates that watches may provide a more stable investment compared to other asset classes.
It’s worth noting, however, that not all watch brands or models recorded such stellar performance. For instance, watches from Audemars Piguet and Patek Philippe performed exceptionally well, with annual returns matching those of stocks. In contrast, brands like Panerai and Tudor experienced negative returns over the same period. This segmentation underscores the importance of brand and model selection when investing in luxury watches.
A key characteristic of the luxury watch market is its relative illiquidity compared to traditional financial markets. This illiquidity means most watches are infrequently traded due to a limited number of active buyers and sellers. This, combined with other market inefficiencies, has several consequences. The infrequent trading of certain watches may lead to outdated prices being used in indices, thereby smoothing returns and potentially underestimating risk. For investors, this lack of liquidity introduces additional challenges, as buying or selling a watch at a stable price can be difficult, resulting in inherently longer holding periods.
The study also explores the role of luxury watches in portfolio diversification. By including watches in a traditional investment portfolio, the overall risk can be reduced due to the low correlation of watches with other asset classes. For instance, incorporating watches into a portfolio significantly reduces the risk of experiencing an extremely negative return over a certain period. This confirms the potential of luxury watches to stabilise investment portfolios.
Figure 2: Portfolio fluctuation
The figure shows the performance of three hypothetical portfolios. The first portfolio only includes U.S. stocks (50.0%), fixed income (30.0), real estate (15.0%) and gold (5.0%). Portfolio 1a (and portfolio 1b) includes a 10.0% (30.0%) investment in the overall watch market and diminishes the weights of the other asset classes correspondingly. The figure and table show that the main advantage of including a small allocation of watches in the portfolio is its minimal impact on returns (average returns slip from 7.4% to 7.3%) while significantly curtailing risk (volatility drops from 13.4% to 12.1%), showcasing the full diversification potential of timepieces. Beyond a 10% allocation, the benefits diminish unless a more active management approach is taken, i.e. only the most attractive watch brands are added to the portfolio. However, in practice, most U(HNWI) investors would not invest more than 10% of their wealth in collectables (e.g., wine, vintage cars, etc.).
This diversification benefit is not replicable by simply investing in stocks of watch manufacturers, which are often part of larger luxury conglomerates with varied business interests beyond watches (e.g., LVMH or Richemont). As such, the physical ownership of luxury watches provides a distinct investment profile compared to stocks in watchmaking companies.
For investors pondering whether to add luxury watches to their portfolio, several practical considerations are essential. First, the choice of brand and specific model is crucial, as performance varies widely across different segments of the market. Understanding the nuances of watchmaking, the history and reputation of brands, and the specific features of the specific watch in question will enhance investment decisions. It would also be beneficial to join different networks of watch enthusiasts, as this would ease the illiquidity challenge and make it easier to find rare and exceptional timepieces.
Additionally, the illiquidity of the watch market means that investors should be prepared for potentially longer holding periods and challenges in converting watches into cash quickly. But for those willing to navigate these complexities, luxury watches offer an investment that combines passion, tangible enjoyment and, of course, financial benefits.
Luxury watches present a blend of aesthetic appeal, craftsmanship and upside potential. While they may not outperform traditional asset classes like stocks or gold in terms of returns, their lower risk and diversification benefits make them an attractive addition to an investment portfolio. Luxury timepieces never go out of style.
Investors looking to include luxury watches in their portfolio should conduct thorough research and consider the long-term nature of this investment, bearing in mind the distinct market dynamics and illiquidity associated with collectable timepieces. With the right approach, luxury watches can serve as both a symbol of personal achievement and a stable component of an investment strategy.