The Investment Handbag Minefield – Part 1: What is an investment and what do you need to consider?

This old chestnut. People have a tendency to splash around the word ‘investment bag’ like holy water. But when you do the math, true investment bags are few and far between.

There have been a number of articles written about how a *insert designer brand name here* bag increases value quicker than the stock market etc – these articles rarely tell the full story, and rarely tell a potential purchaser how to buy, what to buy and what to consider in a capital investment.  They perpetuate the misconception that by simply buying an expensive handbag, you are making an investment. Ergo, you will make a profit.

If only it was that easy.

Before we go any further, I note that the word ‘investment bag’ is generally used in two contexts which have two fundamentally different meanings.

• If the word ‘investment’ is used in the context that buying one good quality daily bag which will last you longer as opposed to several lesser quality bags, which in turn, will need to be replaced more frequently – then yes, the luxury bag often represents a good value purchase. A good value purchase is not an ‘investment’.
• If you use the word ‘investment’ in the context that buying a bag now will mean you will be able to sell it at a net profit in the future, then there are a number of things you should consider before making your purchase. Simply attaching the word ‘investment’ to something doesn’t mean it will ensure a profit.

This article focuses on the latter point. And notably, this is just an article about matters which should to be considered when contemplating an investment purchase. It is not an exhaustive list and it is most certainly not financial or commercial advice.*

Yes, the asterisk means there is a disclaimer. Read it.

The capital investment and acquisition costs

The capital investment is the purchase price of the handbag. What you actually hand over to the store or the reseller. If you are purchasing from the store or from a reseller registered for GST, the purchase price will almost inevitably include a tax component. If your purchase is a private purchase, then you will wear the tax. If the purchase is a business asset purchase, then you should be able to get a GST input credit. If you can’t claim a 10% GST input credit or other offset, then you immediately have 10% of the value of the bag to make up in capital growth before you actually make any profit.

If you buy from a reseller or a personal shopper, then the purchase price will likely also include a commission and/or shipping charges. Again, these are acquisition costs which will need to be made up in capital growth before you make any profit.

Similarly, if you are purchasing in a foreign currency and importing the item, then it is likely that you will suffer an exchange rate loss of some sort, as most banks and Paypal charge foreign currency fees (usually approx. 3%) as well as an international transaction fee. Be aware of these costs before you buy. From 1 July 2018, all imports of goods into Australia, regardless of value, will be subject to 10% GST, in the case of bags and jewellery an additional 5% import duty, and a customs handling fee (usually about $90).

Given Australia doesn’t have any domestic luxury manufacturing, the Australian dollar is not usually the base currency when you are purchasing such an asset. The relationship between the Australian dollar and the Euro and the US Dollar are very important to consider. Depending on which currency the Australian dollar in stronger against, may inform where you source an asset from. In addition, you need to know when you are buying against the currency cycle and when luxury houses are expected to update the prices of their items.

Capital opportunity costs

By spending your money on a handbag, it means you are forgoing the opportunity to invest those funds elsewhere. Before investing, do your research on other investment options to make sure you are actually making the best investment based on the information you have to hand. There is no point investing in a handbag which will make X% annual return, when you could make a comparable investment at X+3% annual return. Investing in the handbag could actually mean you make a lesser return which will only compound in the medium to long term. Remember, an investment isn’t really about the item itself, it is about risk and return. If the best comparable investment is in pork belly futures, then buy pork belly futures.

Holding costs

You also need to consider how much it is going to cost you to hold the handbag over the term of the investment. How much does it cost to insure each year? What are the routine maintenance costs (if any)? Is there a cost of storage? The holding costs of the bag need to be considered and deducted from the expected annual return of the handbag. If the bag costs more to hold each year than its expected increase in value, then it isn’t a good investment. Don’t buy it.

Inflation

Inflation is the (usually) steady increase in prices over time. Remember, when you were a kid and a bag of chips costs 80c and now the same bag of chips costs $2.50. That is inflation. In Australia, annual inflation is approximately 2-3% per annum. Hence, when talking about an investment over time, it is important to talk about the investment in a net value sense. That is, in any proposed selling price (the nominal price) there is a proportion of that price which is inflation and not capital growth. For example, if you buy a handbag in 2000 and it cost $1000, in 2018 the estimate sale price of that handbag will be $1000 + capital growth (if any) + 18 years of 2-3% inflation compounded annually. So, assuming 2.5% annual inflation over 18 years, the inflation on a $1000 investment is $559.65. So, if you sell it for $1700 in 2018, $559.65 is inflation and $140.35 is gross profit. Inflation is not profit. The effect of inflation is cumulative over time.

Risk

Every investment has a risk component. You may have heard the saying ‘risk and reward’. Well usually the greater the risk, the greater the reward. For example, depositing cash into a savings account only attracts a small amount of interest because it is a very safe investment. Contrast that with investing in a venture capital project, which may have a very high rate of return but also a high risk that you may lose the lot. With holding a handbag over time, there are a number of risks – it may get stolen, it may get damaged, it may go moldy in a humid climate. Any potential for loss or damage is a risk to your capital investment. Most of these risks can be minimised by having comprehensive insurance – this means you will minimise your risk but increase your holding costs.

The largest, and the principle non-insurable risk, is whether the item will still be in demand when you decide to sell it. If there is a limited (or no) market for it, then that will substantially affect the value of your investment. For more on this, read part 2 here.

Transaction costs (selling costs)

Depending on the deal you strike with a potential purchaser, your selling price may also include postage, transit insurance and Paypal fees. These amounts are selling costs and need to be deducted to ascertain the net profit of the investment.

Capital gains tax (investment assets)

If you are holding a handbag as an investment asset and are deducting costs and tax etc against your personal or business earnings, then when you sell the handbag you will likely have to pay capital gains tax. In principle, tax is payable on the difference between the purchase price and the selling price (less the rate of inflation), being the value of the net capital gain. That being said, it will bite into your net profit.

Superannuation

Many people vary their self-managed superannuation fund portfolio by delving into purchasing real estate, art, diamonds and even hand bags. But the good old days of wearing your superannuation funded luxury item are well and truly over. The laws are subject to change but currently all physical superannuation assets must be stored off residential premises, cannot be used for personal use and must be separately insured in the name of the super fund. So yes, you can by them, but no, you can’t use them or display them at home.

Net profit

Assuming, you sell a handbag for more than what you paid for it, you will make a gross profit. Note that I said gross profit. The seller then has to deduct all acquisition costs, holding costs and selling costs from the gross profit to determine the net profit before tax. If the sale is a taxable sale (where profit is income not a capital return) then the seller will also have to pay a percentage of the net profit before tax in income tax. The seller is left with the net profit after tax. Whatever that may be. Depending on the value of the bag, it may or may not be worth the exercise.

Conclusion

I’m not saying you shouldn’t buy an investment handbag. All I am saying is that you need to consider all the costs and potential implications of buying an investment bag before you embark on the exercise. You can only make a good investment if you know what an investment is and how it operates.

*Disclaimer: this article is for general information only. You need to obtain your own personal and tailored financial and commercial advice prior to making any investment purchase. This article is not to be relied on as your principal source of information. Further, this article is written with existing Australian laws and regulations in mind – these laws are subject to change from time to time. The laws in other parts of the world will very likely be different and will accordingly need to be considered in place of the rules as they apply in Australia.