Know These 8 Rules Before Investing In Diamonds And Gems

But then, he checked out the storage costs, and that was enough to scare him away from his great idea. Today, he is content to invest in indexfunds.

But there are alternatives to the stock market. And they don't require hundreds of dollars in storage facilities. You have to know what you're doing, however, and you have to be patient.

There are clear advantages to this investment. If you are looking for a different type of market exposure, and you have the time to spend on it, you can keep up with inflation with this instrument.

In some ways, it is like gold and silver and has intrinsic value.

What is it? Gems.

That's right. Gemstones such as diamonds, emeralds and sapphires. They hold their value, they are attractive, and they are always in demand.

But first, there are eight things you need to know about investing in gemstones.

1. There are two ways to invest. You can buy stock in a company that is related to the industry, such as a mining company. I'm going to talk about how to buy the actual stone.

2. Your average rate of return on stones is typically the rate of inflation. While there are cases when they grow faster, these tend to be due to a specific piece's history. Perhaps a famous person owned it before you did. Or there might be changes in mining: For example, if mines are depleted, the stone becomes less available and perhaps more valuable. Or technology was developed that allows for the growth of mining, thus expanding the available quantities.

3. Gemstones are not liquid. Sure, this may sound obvious, but it's important. It means you need ways to get your hands on cash while you look for a buyer. With diamonds, you can't just walk into the local diamond buyer's premises and get the going rate for diamonds, as you can with gold. Instead, a diamond's value is determined by many factors, including the quality of the diamond and how much the person you are selling it to is willing to pay.

4. You make your money on the buy side of the investment. Since gemstones only increase around the value of inflation, it can be a challenge to get a return that is worth the risk you are taking. To get that, you will need to buy the stone enough below retail that you are making money when you sell. How do you do that? In order to buy diamonds below retail, you will need to find primary wholesalers (those mining the stones) or secondary wholesalers (those buying from the primary), or you will need to look for deals at places such as flea markets, estate sales or pawnshops.

5. You may need to get professional help. It's crucial to know as much as possible about what you're looking for before you go shopping. That can be tricky for the inexperienced buyer. Can you recognize a fake? Do you know the differences in quality? Every diamond is different, and that affects the value. Depending on your knowledge level, you may need a good appraiser, and that will add to your purchasing costs.

6. Fraudsters are prevalent. In a highly specialized industry, there is plenty of room for fraud. If someone is pushy and uses terms such as "investment grade," leave and buy somewhere else. They are trying to prey on the new buyers who have heard gems are the place to invest. Instead, you want to hear terms that relate to the actual quality of the stone, not a broad description. For example, with a diamond, you want the salesperson using terms such as clarity, cut, color and carat.

7. The sell side is as hard as the buy side! When you are ready to sell, you won't get retail prices for your gemstones unless you own a store. Instead you will sell to other buyers, auction houses or stores. You will have to find the buyer and handle all negotiations and logistics of delivering the goods.

8. The tax man still wants his cut every time you make a profit. Capital gains taxes apply, so track all of your expenses and work with an accountant.

The Investing Answer: While investing in gemstones seems like a great way to diversify, it is full of potholes that can easily trip you up. Do your homework so you can understand more about the stone you will be buying. You will also need patience, liquidity and the desire to do the legwork for buying and selling. It is more like running a business than investing in a financial instrument, so be prepared for the work.