Is this situation familiar? You have a client who makes a good living and has amassed a nice net worth over time. The client could do even better if they allocated their discretionary cash flow more effectively. After reviewing their situation, you discover that the client is involved with a hobby. As an outsider who is not particularly interested in the client’s hobby does it sometimes seem confusing when you learn how much is spent on the pursuit? After all, the client could allocate the same amount of money towards their retirement or other financial objective.
This was the question we asked ourselves in the Lab; basically, why do some people allocate a large percent of their cash flow and net worth position to hobbies where the actual return on any assets purchased is relatively low? When viewed with an economic lens, making hobby expenditures just does not make a lot of sense.
It turns out, however, that from a client’s perspective, hobby expenditures are worthwhile. Our study looked at those who collect postage stamps. Hobbies provide clients with a psychic return. In our study, we found that a hobby may provide a return equal to at least 3% annually. The key financial planning takeaway is this: Work with someone who has a hobby in ways that help the client understand the process of purchasing, insuring, and ultimately selling a collection. Know that the client is likely receiving a value from their activity that does not show up on a traditional cash flow or balance sheet statement.
Paper Abstract:
“This paper documents the extent to which collectors—specifically, those owning collectible classic US postage stamps—experience an opportunity cost associated with expenditures on their collection. Results show, based on stamp price, S&P 500, bond, and T-bill rate data over the period 1969 through 2013, that collectible stamps tend to underperform stocks and bonds on a risk-adjusted basis. Using estimates based on the Modigliani measure (M2), it was determined that collectors incur an opportunity cost when selecting collectible stamps over more traditional investments. However, it is known that collecting as a hobby provides sociological and psychological benefits. This paper adds to the literature by illustrating how collecting also provides psychic return benefits that can be valued similarly to investment returns. In this study, the foregone return rate of stamp collecting for those who allocate a significant percent of available resources to their collection equates to between 3% and 13% on an annual basis.”
Grable, J. E., & Watkins, K. (2015). Quantifying the value of collecting: Implications for financial advisers. Journal of Family and Economic Issues, 36(4). (DOI) 10.1007/s10834-015-9471-2