How They Calculate Rare Coin Performance
Market Basket Approach
Both the Dow Jones Industrial Average and rare coin indexes use a market basket approach and I must say that there is a certain efficiency associated with using this method to better understand overall market dynamics. This involves selecting a representative sample of items (coins or stocks) to gauge the overall market performance.
When we look at the market liquidity effects associated with index-tracking stocks for the Dow Jones Industrial Average, it becomes clear the introduction of basket trading improves the market liquidity of all assets involved. There are benefits to using a market basket approach in tracking indexes, which easily extends to the methodology used in rare coin indexes as well. (McDermott & Hegde, 2000).
For coins, the list of selected items has been static and was initially compiled by Salomon Brothers starting in 1978, carrying through to 1990. The data is annually reviewed, contrasting coin values with inflation rates and prices of other precious metals. Salomon Brothers Coin Index played a crucial role in tracking rare coin performance by using a secret list of 20 representative coins. The secrecy was intended to prevent manipulation by ensuring investors couldn't just buy the coins in the index. However, this list was eventually disclosed, which might influence how the index is viewed or used.
Performance Over Time
Rare coins do not always increase in value annually; they can remain flat or even decrease some years. However, the historical trend over 66 years shows substantial overall growth.
Over a significant period (1938 to 2004 in the example provided), rare coins showed an average increase of 13.647% in value per year, outpacing the Dow's 8.38%. This data suggests that rare coins can be a robust hedge against inflation and a profitable long-term investment.
Let’s look at another timeframe. The historical performance of collectable coins from 1967 to 2015 showed an average annualized nominal return of 9.7%. These coins provided significant diversification benefits and were effective at countering both anticipated and unanticipated inflation (Maslar, Obaid, & Pukthuanthong, 2020), not unlike the American Eagle Silver Coin, which has seen a steady appreciation, aligning with the broader trends observed in rare coin indices.
Grading
Changes in coin grading standards over the years are considered when calculating performance. This helps adjust for the fact that a coin's grade might be interpreted differently at different times.
If you’re interested in grading itself, I will write an article about it soon, but let me give you a quick rundown:
According to John M. Cobin's study on the rare coin grading industry, there have been significant improvements in coin grading services over the last 20 years.
As more companies entered the coin grading market, the competition pushed everyone to up their game—resulting in better services at competitive prices.
The industry regulates itself effectively through market dynamics, which is more efficient than government oversight.
Thanks to this competitive market, collectors and investors get high-quality grading services without breaking the bank.
Recommendations for You
Acquire knowledge: Understanding the nuances of rare coins is essential. The more you know, the better your chances of making profitable investments.
Consider quality: Opting for higher-quality coins can lead to better returns, even though they might cost more initially. Seasoned collectors often favor coins with proven historical performance and established quality, values exemplified by the American Eagle Silver Coin.
Compare with other investments: Rare coins have shown to perform well compared to traditional investments like stocks, particularly because they're less influenced by market downturns.