Developing an Ideal Rare Coin Portfolio When Starting Out

Many people often wonder in the coin collecting world what a model coin portfolio probably looks like. This query is a bit of human nature; people often look to their neighbors to see where they stand in status compared to others. However, there’s also some value and advice that can be gained from those who are successful in rare coin collecting, particularly those who have the time and effort to put into the hobby.

A Beginner Context
While there is no standard collection that works for everyone, a template collection can work well for beginners who have no idea where to start with rare coin collecting but are new to the hobby.

However, it’s also important for new collectors to understand why rare coin collecting offers both a challenge and alternative way to preserve financial strength in assets as well. Unlike regular government currency, rare coins are not necessarily exposed to what’s going on with politics or national trends and news. Currencies are often inflated and deflated by world dynamics, government movements and mistakes, unrest, and general country buying power. Rare coins, on the other hand, don’t necessarily have these exposures in their valuation.

Additionally, rare coins as an asset allow people to keep their worth private. Most other major public investment tools involve records that can be accessed by the government, companies, snooping reports, and family members as well as hackers. With rare coins, the value is known to the owner and whoever happens to be involved in a buy or sell of a given coin. There is no balance sheet or monthly statement involved. Finally, rare coins tend to hold onto their value better. Even bullion coins go up and down with the swing of spot market pricing. Just recently gold took a tumble in April 2013, reducing people’s gold position values by anywhere from 10 to 13 percent. This sort of fluctuation doesn’t happen near as much or with such volatility in rare coins.

So What Coins Should be Collected?
For those starting out, the best rare coins to go after in first transactions are those where the value is clearly known. In this regard coins which are graded and slabbed are the best pick. Grading and slabbed means that the coin is been evaluated by a recognized coin appraiser company and has been sealed in an airtight container with the certification information, description, and grading score. These types of coins are often seen in rectangular, clear cases with a label of the grading company and detail. While these coins cost a bit more due to the fees involved in evaluation, the buyer has a clear idea of what he or she is buying, as long as the case seal has not been broken.

Slabbed and graded coins are considered the “blue chip” of rare coins in collecting. They are tried and true items that provide a mainstay of portfolios. Graded coins also provide a solid, expected level of collection value because the pricing is generally agreed upon by everyone who wants to buy and sell such a coin.

The above said, there are a lot of coins that are graded and slabbed which aren’t worth much. Someone just went to the trouble of having a given coin evaluated and now it sits in a clear case with a stamp on it. But the coin is still common and not worth much after the fact. So buyers still need to do their homework and understand what kind of a coin is being bought before putting any money down. Just because the coin is graded doesn’t make it a rare holding.

The next thing a buyer needs to be sure of is whether the graded coin is in demand. There are lots of coins that are rare, but that doesn’t mean people want to buy them for their value. On the flip side, some coins that have nothing to do with rarity are in high demand. Silver and gold eagles from the U.S. mint are perfect examples of this situation.

What Grade Should Be Pursued?
Among coins that are graded, are rare and are in demand, certain grades are pursued more than others. Among graders, one of the biggest ones that most people recognize is PCGS. This acronym stands for Professional Coin Grading Service. However, regardless of the grader, the measurement followed is a scoring scale of 1 to 70, with 70 being the best. The scoring essentially represents both the quality of the coin in condition as well as how rare the item is. If a coin-holder is lucky enough to be holding a coin scoring 69 or 70, the valuation will often be far more than its metal worth, especially with bullion coins.

In addition to the numerical score, coin grading also includes a descriptor about the type of coin it is. These include BU for brilliant uncirculated, MS for mint state, VF for very fine, and AU for about uncirculated. There are other descriptors, but these are the major ones. For the beginner, the target is to consider coins that are in the range of MS63 to MS67. These mint coins are the most likely to find without paying a Fort Knox price for them. Many starting buyers tend to find items in the MS65 and MS66 for bullion coins, for example.

Current vs. Past Pricing
Graded coins often have an extensive history for their grade category. Some can date back decades, which is extremely helpful to see how a given coin’s value has appreciated. Buyers should always reference these coin histories before putting any money down on a purchase. There’s no point buying a coin that historically keeps dropping in value over the years.

Don’t Lose the Bank
Those who make a profit in rare coin collecting, aside from the hobby enjoying and personal satisfaction of the hunt for a good coin, often do so because they buy coins that have value and potential to grow. Warren Buffett, a famous Wall Street investor brought the critical principle home, “Buy low and sell high.”

There are two ways to gain value: buy a good deal at a great price, or buy coins with value at a fair price that will appreciate over time. For beginners, finding that one discounted treasure is going to be hard. It’s far easier to find rare coins that have good, long-term value that will appreciate over time. These “blue chip” coins don’t make profit instantly, but they do help build a valuable portfolio that will sell at the right price later and don’t lose value. A good example of a value coin is one that has a proven historical track record in pricing that is older than 50 years. Anything under that time period tends to be risky.

Anticipate Tax Hits
The IRS doesn’t distinguish much between a rare coin or a bullion coin when it is sold. Both are considered subject to capital gains taxes when they are sold and profit is made. However, in most cases coin transactions don’t have to be reported if they involve transaction values under $10,000. That said, any seller, individual or as a company, still has to report the profit on an income tax return, regardless of whether a 1099 was ever filed with the IRS. The general tax rate tends to be in the neighborhood of 28 percent unless the coin was sold within a very short time period. The person’s regular income tax rate then applies in short-term sales.

For a time, the tax changes would have encompassed much more, requiring a 1099 form filing on any sale over $600 with a coin after 2010, but that change was repealed and no longer applies.

Long story short, beginners should expect and understand that taxes on gains will be a cost of doing business in collecting and selling. It’s better to just pay the taxes due than trying to avoid the charge. Doing otherwise could trigger an audit and penalties, which can cost far more.

In Summary
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Developing an Ideal Rare Coin Portfolio When Starting Out
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