Clear investment from savings should be made after setting aside capital for your life goals
If watches are only for time management, why do some people have Patek Philippe? Similarly, if cars are only for transportation, why want a Bugatti Chiron? Clearly, our desire to own the products goes beyond the usefulness that these offer. In this article, we will discuss whether individuals exhibit similar behavior to certain investment products.
reputation knowledge
The desire of an individual to own specific products is called conspicuous consumption. From a behavioral point of view, you can say that such products have expressive characteristics. A man wearing a Patek Philippe watch makes an expressive statement to the world about his tastes and social status, not to mention the pride of owning a classy watch. Individuals may exhibit similar behavior with investment products as well. For example investing in alternative investments such as hedge funds and private equity. The expressive feature comes from the fact that such investments are available only to individuals who can invest a minimum of one crore per fund.
Other investments such as ESG (environmental, social and governance) show that an individual cares about ESG factors, which is currently typical. Then, there are the assets of the passion, such as antiques, art, and other rare collectibles.
It is not as if the individuals investing in the above products do so only for the expressive features. These products can deliver attractive returns, but they can be complicated, and the risks can be difficult to understand. So, should you invest in such products for their expressive features, given the associated risks?
non-core investment
Investment products with expressive features should usually be part of your non-core investments. There are many reasons for this argument. One, your core investments are set up to achieve certain life goals such as buying a home and funding your child’s college education. It is controversial if investments with expressive features like ESGs can consistently generate returns that serve your objectives. It is important to note that institutional investors, driven by societal norms, have increasingly moved towards ESG investments.
If you want to integrate your strong ideologies into your investment decision then you should consider buying such products.
Second, most investments with expressive characteristics such as private equity and passion assets are not liquid. Hence, timing out of such investments to meet your life goals can be difficult.
And third, others such as cryptocurrencies and non-fungible tokens (NFTs) are risky and volatile. As discussed earlier in this column, you can get rich investing in crypto and NFTs, but the downside is high. Therefore, it is unlikely to fit into your core or goal-based portfolio. Generally, after setting aside capital for your life goals, meaningful investments should be made from savings.
Conclusion
The willingness to invest in products that offer expressive features is not uncommon, given the emotional satisfaction they provide. However, it is important to distinguish between financial assets and the expressive characteristics of physical (or real) assets. Why?
Material assets such as art and antiques have expressive characteristics that make passion assets a good investment. Such expressive features come from two aspects. One, exclusivity by owning a rare asset such as a piece of vintage art or Victorian furniture. And second, the accompanying story is what makes the property unique and rare—the exclusivity of an author-signed first print of a 1940s classic, and the legend that you beat others to the winning bid at auction.
While hedge funds and private equities offer exclusivity, they may not provide a compelling narrative. Also, as financial products, they are intangible, not a property of touch-and-feel. This is one of the reasons why largely affluent investors (who are ineligible to invest in private equity) invest in obsessive assets despite low liquidity. Lastly, you should buy such products only after investing your savings to meet intermediate goals like child’s education and down payment for home.
(The author provides training programs for individuals to manage their personal investments)