They say that doing what you love means never working a day in your life, but can the same be said of investing? Will building a portfolio of passion projects and niche interests make your journey as an investor smoother, or is it a recipe for disaster?
Most of the time, the answer lies somewhere in the middle – but it all depends on you, the money you’re investing, and what you consider to be a ‘passion investment’. We offer financial advice to many people looking to grow their investment portfolios and know that the answer isn’t always straightforward. Here’s what you need to understand.
What is Passion Investing?
This refers to the practice of making an investment or series of investments into assets that align with one’s personal interests and hobbies. For some, this may manifest as investing in vintage cars or wine – or, alternatively, art or rare coin collections. Any investment that is made based not just on the more quantitative factors that investors look at, such as value and risk, but also on qualitative factors.
Passion investments tend to be made with a view to diversifying an investment portfolio, but some investors will only ever invest in assets that genuinely pique their interests.
Passion investments are not necessarily a bad idea. While we tend to think of successful investments as being those that are chosen for their ability to generate strong returns with the least possible risk whether they are considered interesting ventures or not, plenty of investors are guided (to some extent, at least) by what attracts them.
Consider angel investors who reserve capital for start-ups in industries to which they feel a more meaningful connection. In these instances, being guided by instinct can be the mark of a very prolific investor. But too much instinct can be a bad thing, and many investors have learned that the hard way.
So, are passion investments generally avoided in the strongest savings and investment strategies? Here are some of the pros and cons to consider.
The Pros of Passion Investing
There are plenty of positives to picking your investments based on what attracts your interest.
This is what makes angel investors so good at what they do – having a real, vested interest in the projects they choose to pursue. Of course, angel investors take a more active role in building their portfolios and nurturing their investments, and many people who are not full-time investors just don’t have the time to do that.
If you’re investing in assets that you are passionate about, like classic cars, artwork, jewellery or collectibles, then you can derive personal fulfilment from the experience of owning them, even if only briefly.
Of course, personal fulfilment cannot replace financial ROI. You don’t want the scales to tip too far in the wrong direction.
It Diversifies a Strong Portfolio
The phrase ‘everything in moderation’ applies very well to the idea of passion investing for most people. While stocks and bonds are excellent for generating a worthwhile ROI, it never hurts to invest in a few tangible assets. Not least of all because they…
…Hedge Against Inflation
This is one of the most compelling reasons why professional investors add a number of physical investments like property or gold into their investment portfolios. These sorts of assets historically have provided a hedge against inflation, meaning that, even during economically volatile periods, they tend to retain value and offer investors a little more resilience during periods of high inflation.
Some assets gain significant value
This one is not cut-and-dried, and it’s important you don’t let your passion cloud your judgement when it comes to depreciating/appreciating value. But there is plenty of scope for passion investments to gain value over time, provided you exercise the right amount of caution.
It’s something tangible to pass on
If you’re interested in passing on valuable assets to future generations but wish to avoid the more prosaic options, passion investments can sometimes be a good alternative. Remember that passing on valuable assets does not free family members from inheritance tax, although you can take steps to minimise its impact.
The Cons of Passion Investing
All investments have their potential downsides, although some are more significant than others. Learning how to approach risk is one of the key things any investor needs to know.
Not all assets gain value
Some works of art gain value, while some will remain the same — or even lose value — even over the course of many years. For instance, restoration work or poor condition can drain an art piece of its value. The same can be said of cars, vintage watches, rare books, wine, antique furnishings and rare coins. For these sorts of passion investments, you will need to be an expert to distinguish between a strong investment and a weak one.
It’s not always easy to separate emotional decision-making from rationality
Passion investing is the perfect synthesis of business and pleasure, but only when it’s done right. If you’re passionate about something, then knowing when to walk away can get a lot harder, and plenty of investors have run afoul of their own enthusiasm. The results aren’t always disastrous, but they’re not necessarily brilliant, either.
Storage and maintenance need to be considered
Tangible assets need some level of care invested into them. Sometimes, this can be very low – nothing more than a secure space in your home for storing them. Others, as in the case of vintage cars, the costs of maintaining and protecting your investment can run much higher. It’s vital you take this into account before committing.
Risk Warning: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.