By Julie Steinberg
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In the most-recent Weekend Investor cover story, we explored “alternative alternatives,” investments that could fall under the collectibles category, such as classic cars, musical instruments and wine, comprising a small portion of one’s portfolio.
Diamonds, which have seen sharp price moves in recent years, also fall under this category. Unlike gold and silver, they aren’t traded on a public exchange. But their recent track record is strong enough to warrant some attention.
Between 1999 and 2010, white diamonds provided annualized real returns of 6.4%, and between 2003 and 2010 they returned 10%, according to an upcoming study by Luc Renneboog and Christophe Spaenjers, finance professors at Tilburg University in the Netherlands and HEC Paris, respectively. The professors explored only periods for which they had enough transactional data, Spaenjers says.
Between 1999 and 2010, colored diamonds returned an annualized 2.9%; between 2003 and 2010 they returned 5.5%, according to the professors’ data.
By contrast, according to the study, global stocks returned an annualized minus-0.1% between 1999 and 2010, and global bonds returned 3.3% during that period.
Longer-term data on diamond performance doesn’t exist, though Spaenjers says there was a boom and bust in the late 1970s and early 1980s, followed by slightly increasing prices until the late 1990s.
One-carat diamond prices have had two big busts since 2006, according to the RapNet Diamond Index, or RAPI, which represents the average asking prices on RapNet-Rapaport Diamond Trading Network: once after the financial crisis and again after July 2011.
Because prices are still low compared with recent peaks, now could be a good time to invest, says Martin Rapaport, chairman of the Rapaport Group, an international diamond company based in New York, though he warns the short-term market is “choppy.” In the longer term, increasing interest from Chinese and Indian middle classes, coupled with the relatively fixed number of diamond mines, could push prices higher, he says.
You can purchase loose diamonds yourself at an auction or through a wholesale distributor. If you do, you should work with an appraiser, jeweler or broker who knows the business and the quality and value of the stones, says Rapaport.
Investors can also work with a wealth manager. Eli Butnaru, CEO of Mora Wealth Management USA in Miami, has put clients in a fund solely dedicated to investing in rare colored diamonds. Clients pay fees of 2% and 20%, and the entire investment comprises only 1% to 3% of their portfolios, he says.
One downside: the opaque nature of the industry. There isn’t an established mechanism to immediately know the price of a diamond, says Andrew Feldman, a financial adviser who recently obtained a patent to create an exchange-traded fund for diamonds.