Should I invest in luxury fashion amid inflation? Here’s what to consider

By wazup on August 27, 2023 Comments Closed / 93 views

Some people collect luxury goods as investment pieces. Think of a Birkin bag, art by the legendary Jean-Michel Basquiat or a Rolex. Anything considered timeless or high-quality and that appreciates in value can be called an investment piece.

The luxury market tends to be more resilient than other sectors during economic instability because of high demand, among other factors. That said, is this inflationary period actually a good time to invest in luxury goods? We took a closer look.

Buying luxury goods amid inflation

Gucci is part of luxury conglomerate Kering. Photo: Gucci

The US Federal Reserve has raised interest rates 11 times since March 2022 in an attempt to cool inflation. Interest rates are the highest they’ve been in 22 years and, consequently, we’ve seen the cost of borrowing increase and spending on non-essential goods decrease.

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While Americans have cut back on spending, the demand for luxury goods is still strong. Research by J.P. Morgan shows a seven per cent year-over-year increase in the luxury goods market in the fourth quarter of 2022, despite significant price hikes.

LVMH recorded record sales and profit highs for 2022. Photo: Bloomberg

Luxury brands raised the prices of their products by almost 17 per cent in 2020 and early 2021 in response to lower sales during Covid-19, according to a 2022 study by KPMG International. This change is significant considering typical price increases are five per cent to 10 per cent. These price increases didn’t only benefit luxury brands; people who invested in these goods in prior years may have also seen gains.

Gloria H. Gill, a retiree who we spoke to on Facebook Messenger, said the value of her large classic Chanel bag has more than doubled in about seven years. Gill bought the bag for US$4,800 in Paris in 2016. It now has a market value of around US$10,000.

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“I have sold bags before, but I doubt I’ll sell this one,” Gill said. “It’s listed in my will, and my sons are aware of its high value.”

The luxury market, such as Tag Heuer watches, tends to be more resilient in comparison to other industries. Photo: EPA-EFE

Luxury goods can sometimes hedge against inflation when they appreciate in value, says William Huston, founder of Bay Street Capital Holdings, which has offices in Los Angeles, New York and Fremont, California.

As with any investment, there are risks. As Huston points out, your money could potentially earn a higher rate of return elsewhere. Also, your item could get lost or destroyed, or it may be difficult to resell.

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Assess your financial foundation first

A Chanel bag can be resold, often for a higher price, on the second-hand luxury market. Photo: David Wong

Before investing in anything, assess your financial situation. For instance, is your emergency fund well stocked? Keep in mind that possessions are considered “illiquid assets” – not quickly convertible to cash if you need it in a pinch.

Also, saving for retirement comes before investing in luxury goods, says Dora Meyer, a certified financial planner at WellAcre Global Wealth Advisors in Santa Monica, California.

Hermès remains one of the most popular luxury brands on the market. Photo: AP

“Make sure you are taking advantage of any tax-advantaged accounts, so your 401(k), your Roth IRAs, before you look at investing in something like this. [And] your HSA,” she says, referring to retirement accounts in the US.

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Meyer also advises, “Be careful [with] buying on credit, especially in this environment when interest rates are a little bit higher.” And she recommends buying from a reputable source to avoid knock-offs.

Investing in timeless pieces

Chanel increased prices for some of its most iconic bags. Photo: Chanel

Valerie Schwank owns the Fashionista Consignment Boutique in Coconut Grove, Florida, where she buys and sells luxury goods. Schwank has seen a significant boom in her business since the pandemic began and is an advocate for investing in luxury pieces. She recommends buying timeless and high-quality pieces, as they tend to hold their value.

“I always recommend that you buy a staple,” she says. And by staple, Schwank means “ the Chanel classic double flap, no-nonsense handbag, which has been around forever”.

Vestiaire Collective sells second-hand luxury goods. Photo: Vestiaire Collective

Think about factors like the colour and materials of items, too. That often differentiates timeless luxury goods from ones that won’t hold as much value over time. Keeping your items in good shape, especially if you plan to resell, is also important, Schwank says.

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Calculating your potential returns

Asian consumers are beginning to warm to Vestiaire Collective, a luxury fashion resale site, which is now in Hong Kong, Singapore, Australia, Korea and Japan. Photo: Bloomberg

Research how an item has historically performed before purchasing to ensure it’s a worthwhile investment. You can go to luxury resale sites such as Vestiaire Collective, The RealReal and Rebag and check how pieces have appreciated over time.

Huston advises having a financial plan before making a luxury investment. “With the financial plan, you’d be able to see, ‘I’m 30 years old, I’m gonna save US$300 a month,’” he says, as an example. That plan can give you context to decide, “‘That’s a meaningful amount of money to me and I can afford that US$300, and it’s better for me to save US$300 in my 401(k) than to buy a watch,’” he says.

Jean-Michel Basquiat’s Moon View being previewed in Hong Kong. Photo: Jonathan Wong

You can also improve your investment returns by negotiating when it comes to items like art, he adds.

“A lot of this luxury stuff is negotiable because again, it’s illiquid” and not easily converted to cash, he says. “So if you find the right person selling the right thing at the right time, you can get it for a really good value because they just want to get some of their money back.”