Investing in diamonds can be a tricky business.
Are diamonds truly a good investment?
On paper, they would appear to be one of the very best. Remember, 90% of managed funds don’t manage to beat the underlying market, so it’s questionable why anyone would pay for such market ‘expertise’. If interest rates were 5% or 8%, perhaps the investment outlook for diamonds and other assets like classic cars and fine wines would look very different, after all, why take on any risk if you can grow your worth by 8% per year without lifting a finger?
Sadly, we live in exceptional times and central bankers appear to be happy to print paper money and take on record levels of debt – in these circumstances, diamonds make more sense than ever.
Diamonds have a high intrinsic value, they’re always in demand and they last forever - plus, they’re small, portable and easy to store (unlike gold, cars or fine wine). And, like most gems and precious metals, past performance shows that they will increase in value over time.
However, there are issues that need to be faced when making a case for investing in diamonds. One is the pricing. Unlike gold which is valued by weight because one block of gold is pretty much the same as every other block of gold, diamonds don’t have a universal price per gram. No two stones are exactly the same and every diamond has to be valued on its individual merits and most of the time that valuation is going to be somewhat subjective. Which means choosing which diamond to buy in the first place can be the hardest part. Despite this, many people are investing in diamonds - more than ever now that traditional investment opportunities are failing.
But how do you go about buying a diamond for investment, and how can you be sure of making a good return?
I would never encourage anyone to buy a diamond as an investment without a full awareness of the risks and potential pitfalls. With that in mind, I've identified three of the most common mistakes people make when they invest in diamonds.
1. Paying too much
It sounds obvious, but never has the mantra ‘buy low, sell high’ been more appropriate than when buying diamonds. However, when it comes to diamonds, ‘buying low’ is much harder than it looks.
First, there’s the tax. Unless you are storing your diamonds in a secure vault and not taking delivery of them, you will have to pay VAT. So, if you are serious, you need to store them and make sure this is done properly. If you take delivery and pay VAT, it means your diamond needs to grow by 20% for you to merely break even. Some firms offer secure vault storage in Antwerp or Geneva to avoid this issue for their customers. This immediately puts you at a huge advantage. I should add that should you decide to remove the stones from storage and bring them back to the UK, VAT must be paid (just in case lawyers are reading this - unlikely but you never know).
Secondly, there’s the retailer mark-up. This can vary from store to store so it’s crucial to shop around and make sure that you’re buying at the most competitive price available. I often hear about people trying to sell their ‘investment’ diamonds back to the trade - only to realise they were completely stung on the original purchase. A £50,000 diamond may only attract offers of £15,000 to £20,000 from the trade. Of course, the internet has transformed the market so if you buy from a reputable firm working with sensible margins, you can get a stunning diamond for close to wholesale prices but don't assume that all internet retailers will be offering the sharpest prices, some are charging more than the boutiques with their coffee and comfy sofas.
Thirdly, if you decide to take delivery of your stones and wear them, bear in mind that the setting will be virtually worthless when the time comes to sell. And what about insurance? If your diamonds are valuable enough to be an investment, they should probably be insured - that’s another expense you’ll need to recoup when you sell. Make sure your stones are insured if they are vaulted and remember that security boxes are not insured.
2. Expecting too much
Investing in diamonds is not a short term 'get-rich-quick' scheme. I have seen them marketed as such and this is both irresponsible and unfair. Diamonds take time to increase in value and should only be bought with a view to medium to long term growth only. If you are fortunate enough to buy stones that can quickly be sold on at a profit, see it as an unexpected bonus, but don’t expect it. Diamonds are a commodity and like any commodity, their value can go down as well as up. On the whole, based on past performance, they go up - just slowly and they are not volatile either. In a recent survey, only antique furniture was less volatile than diamonds! This means that when you invest in diamonds, your money is going to be locked up for a while (albeit in a very beautiful asset) so it’s important to be absolutely sure that you:
a) want to invest in this way and b) can afford to.
If you need to sell early to get your money back you may get less than you spent in the first place
Remember, diamonds are rare but not that rare. There are hundreds of thousands to choose from, but, and it’s a big ‘but’ – diamonds with genuine investment potential are rare. I think that only 3-4%% of all diamonds have any investment potential (to give some context).
3. Buying the wrong sort of diamond
The final hurdle when buying a diamond as an investment - and the one where most buyers fall - is knowing which diamonds are worth investing in. Some diamonds are easier to resell than others so investing in one of these will obviously make your life easier in the future. Trends change and what may be popular to Russian buyers may not be in demand from, say, Indian buyers.
The most important thing is to buy a certified stone, I would recommend a GIA certificate. This is true whenever you buy a diamond, whether it’s as an investment or as an engagement ring, for so many reasons. A certified diamond is far easier to resell than one that hasn't been certified and will be more desirable - especially if it’s certified by one of the most highly respected labs (GIA and AGS are best). Keep the certificate in a safe place but separate to the diamond itself, just in case. I would go as far as to say that you should not buy a diamond without a certificate under any circumstances.
The shape of the diamond can also be a factor. Round brilliant is the most popular diamond shape (about three quarters of all diamonds sold are round) so investing in a round brilliant diamond will give you access to a bigger resale market. If you’d rather not buy round, opt for one of the other popular shapes, such as the princess cut perhaps.
Always buy the best quality - that means a diamond with an Excellent or Very Good cut grade as well as above average colour and clarity. However, don’t be fooled into thinking you have to buy the biggest, best quality diamond in the world. The opposite is actually true. An extremely high-spec diamond will only be of interest to a few wealthy buyers and will be harder to sell on. You should instead aim to buy a high quality diamond of wide appeal - again, this will be more desirable to both trade buyers and private individuals.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.