Luxury Watches: The Next Frontier for Savvy Investors

As traditional markets face increased volatility and risk, a growing number of astute investors are turning their attention to an unconventional asset class: luxury watches. Once merely status symbols adorning the wrists of the affluent, these exquisite timepieces are now emerging as a robust vehicle for portfolio diversification. With the secondary market booming and prestigious brands like Audemars Piguet and Patek Philippe yielding returns that outpace those of conventional financial markets, luxury watches may well represent the next frontier for ultra-high-net-worth individuals seeking stable investments.

The Market for Luxury Watches

The global luxury watch market has witnessed significant expansion, with the secondary market now valued at approximately USD 24 billion (Dupreelle et al., 2023). Remarkably, one-third of luxury watches are bought and sold second-hand. This growth has been driven by a surge in demand for collectible timepieces, coupled with limited production and availability through authorized retailers. For instance, collectors may find themselves waiting up to five years to acquire certain Rolex models, making the secondary market an increasingly vital avenue for both investors and collectors.

Our analysis focuses on the investment performance of 13 of the most frequently traded luxury watch brands from January 2019 to September 2024, utilizing indices provided by Chrono24, a leading online marketplace for pre-owned luxury watches. The findings reveal that while luxury watches generally offer lower returns compared to stocks, their lower risk profile and weak correlation with the stock market make them appealing for risk-averse investors seeking diversification. In essence, luxury watches are largely immune to the turbulence of stock market fluctuations. However, the luxury watch market is not monolithic; different brands exhibit distinct performances across various financial indicators.

Risk and Return Characteristics of Timeless Watches

On average, luxury watches delivered an annual return of 5.68%, which, while underperforming U.S. stocks (12.85%) and gold (13.06%), still surpassed fixed income (negative returns) and real estate (3.14%). Notably, the volatility of the luxury watch market was significantly lower compared to that of stocks, indicating that watches may provide a more stable investment alternative.

However, it is essential to recognize that not all watch brands or models performed equally well. For example, watches from Audemars Piguet and Patek Philippe achieved annual returns that matched those of stocks, while brands like Panerai and Tudor experienced negative returns during the same period. This segmentation highlights the importance of brand and model selection when investing in luxury watches.

The Illiquidity Challenge

A defining characteristic of the luxury watch market is its relative illiquidity compared to traditional financial markets. Most luxury watches are infrequently traded due to a limited number of active buyers and sellers. This illiquidity, combined with other market inefficiencies, has several implications. Infrequent trading of certain watches may lead to outdated prices being reflected in indices, potentially smoothing returns and 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.

Portfolio Diversification Brings Stability

Our study also examines the role of luxury watches in portfolio diversification. By incorporating watches into a traditional investment portfolio, overall risk can be mitigated due to the low correlation of watches with other asset classes. For instance, including watches in a portfolio significantly reduces the risk of experiencing extremely negative returns over a specified period. This underscores the potential of luxury watches to stabilize investment portfolios.

The analysis illustrates the performance of three hypothetical portfolios. The first portfolio consists solely of U.S. stocks (50%), fixed income (30%), real estate (15%), and gold (5%). Portfolio 1a (and 1b) includes a 10% (30%) investment in the overall watch market, with corresponding reductions in the weights of other asset classes. The results indicate that the primary advantage of including a small allocation of watches in the portfolio is its minimal impact on returns (average returns decrease from 7.4% to 7.3%) while significantly curtailing risk (volatility drops from 13.4% to 12.1%). This showcases the full diversification potential of timepieces. Beyond a 10% allocation, the benefits diminish unless a more active management approach is adopted, focusing on the most attractive watch brands. However, in practice, most ultra-high-net-worth individuals would not invest more than 10% of their wealth in collectibles, such as wine or vintage cars.

It is also important to note that this diversification benefit cannot be replicated by merely investing in stocks of watch manufacturers, which are often part of larger luxury conglomerates with diverse business interests beyond watches (e.g., LVMH or Richemont). Thus, the physical ownership of luxury watches offers a distinct investment profile compared to stocks in watchmaking companies.

Practical Implications for Investors in Luxury Watches

For investors contemplating the addition of luxury watches to their portfolios, several practical considerations are paramount. First and foremost, the choice of brand and specific model is crucial, as performance varies widely across different segments of the market. A deep understanding of watchmaking, the history and reputation of brands, and the specific features of individual watches will enhance investment decisions. Joining networks of watch enthusiasts can also help mitigate the illiquidity challenge and facilitate access to rare and exceptional timepieces.

Moreover, the illiquidity of the watch market necessitates that investors be prepared for potentially longer holding periods and challenges in quickly converting watches into cash. However, for those willing to navigate these complexities, luxury watches offer an investment that combines passion, tangible enjoyment, and financial benefits.

A Timeless Addition to Any Portfolio

Luxury watches embody a unique blend of aesthetic appeal, craftsmanship, and upside potential. While they may not consistently 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. After all, luxury timepieces never go out of style.

Investors seeking to incorporate luxury watches into their portfolios should conduct thorough research and consider the long-term nature of this investment, keeping in mind the distinct market dynamics and illiquidity associated with collectible timepieces. With the right approach, luxury watches can serve as both a symbol of personal achievement and a stable component of an investment strategy.