There is a myth that I have noticed in my nearly twenty years of purchasing diamonds. When you stop to really consider this myth, it can be quickly debunked with some “rational” thinking. The myth is that the diamond that you purchased for a retail price five, ten, or even twenty years ago, should have held its value, or at the very least, only suffered a minimal decrease. I say “rational” thinking because while I am no psychologist, something funny seems to happen when I discuss this topic with clients. If the diamond in question is not their property, if it is not something that they purchased with their hard-earned money or wore for years with pride and heartfelt emotion for the love that it symbolized when given as a gift, it doesn’t take long to understand why the idea that a diamond should, by its very nature, increase in value over time, makes virtually no sense.
However when they do have a personal and emotional investment in the diamond, “rational” thinking seems to be lost and many are indignantly blind to the fact that they have allowed emotional value to factor into the equation of actual value. So the question is, “Do diamonds really lose their value over time?” The answer is as clear as mud. Yes and No.
While there is a market for investment grade diamonds, a topic which we will briefly touch on in this article, for the vast majority of diamond owners, their diamond simply doesn’t fall into that category. The information that follows here addresses the millions of consumers who purchased diamonds to wear and enjoy, never thinking that they might one day have a need or desire to sell. This information will help you understand the realities of the diamond trade, what value you can realistically expect when selling yours, and hopefully, help you to navigate not only the selling process, but become a smarter consumer, if you choose to purchase more diamonds in the future.
Let’s start by diving into some of that, “rational” thinking that was mentioned previously. Again, unless your diamond was purchased as an investment from a reputable broker for investment purposes, your diamond is not an investment. According to Investopedia, “An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future.”
Now, while you could certainly make the case that it was your hope that the diamond would appreciate in value over time, I think it’s a safe assumption that this was not your primary consideration when deciding what shape, quality, size, and store you were purchasing from. If it was your primary goal and you determined that purchasing something from a retail store at a retail price was the most astute investment decision, my strong advice is to stop making your own investments and seek a qualified financial advisor immediately.
So, you realize that your diamond was not purchased as in investment, but it’s common knowledge that diamonds increase in value, right? Hopefully, that is not the sales pitch that the “expert” behind the counter gave you when you were buying. Diamonds are not gold or silver or platinum. They are not traded on the stock exchange or commodities market. So, where did this widespread feeling that any diamond you purchase will increase in value come from?
Aside from the possibility that you were intentionally or unintentionally misled by the sales person who sold it to you, I have come to the conclusion that there are two basic reasons that people feel that every their diamond is an investment that will increase in value over time. The first reason is what psychologists call the endowment effect. Many studies have shown that people ascribe more value to things simply because they own them. As I’ve discussed in detail in our previous article, “What you need to know when selling your diamond.” this can be a dangerous mindset when trying to maximize the amount you will realize for your stone. The second reason that people assume diamond values go up over time is because history shows that they do.
Okay, so the myth is only a half myth. But this half is still grossly exaggerated and misunderstood. Let’s dive in.
Looking at the past 25 years of average pricing for a 1.00ct round, H color, VS2 clarity diamond, here are the price changes that we find:
5 Year: -5%
10 Year: +16%
15 Year: + 22%
20 Year: +26%
25 Year: + 64%
*(Values taken from Diamond Price Statistics published in Rappaport Magazine January 2017)
While that may not look too bad at first glance, consider this, there is no compounding interest on a hard asset like a diamond. After 25 years that 64% value increase means that a $1000 investment in 1991 would have a value today of a whopping $1640.
Now you’re probably saying to yourself, why does this matter? We already determined that it was not an investment when I purchased my diamond, and I understand I’m going to take a reasonable loss. Well, what is reasonable?
If you purchased a particular diamond for $5000 ten years ago, based on the 16% increase shown above, that stone is worth $5800 today, right? Wrong.
Why? Because you paid a retail price. Your $800 increase in value over ten years is not even enough to account for vast difference between retail stores’ pricing for the same item.
If you made that purchase for $5000 and the retailor only made a profit of 16%, in theory, you have not lost money. But if you purchased from a big box or mall jewelry store who is making 25% margins or more, you’re still upside down in the stone after ten years. Let’s look at the reality of the current value of that same stone.
Retail price 10 years ago= $5000. Probable Retail profit margin= 25%. Ten Year value increase=16%
$5000(Retail Price) with a 25% profit margin =$3750 (wholesale cost to retailer).
$3750 Cost + 16% value increase = $4350 today.
So, $4350 is what the retailer might pay his vendor today for the same stone. In the diamond industry, retailors rarely own their diamonds. They are provided by vendors to place in the store and the jeweler only pays for them when they have sold. So if they are going to invest their money to own the stone that they have on memo (consignment) from a vendor, it has to be a good deal for the retailer. So from that $4350 current value, subtract another 20%. That’s $3480! The diamond you purchased ten years ago for $5000 is now worth roughly $3480 to a professional and reputable buyer. Not a 16% increase, a more than 30% loss. So where did all that money go? Into the pocket of the guy who sold it to you.
The example above is based on one particular size, shape, and quality diamond. The outcome can change fairly significantly by changing these variables around. H color and VS2 clarity 1.00ct round diamonds are a classic look with a mid-quality price point that buyers have steadily requested over the years. By increasing or decreasing the quality and/or carat weight, we can find larger fluctuations for the better or worse, based on other market factors. However the most dramatic changes we see with diamonds, and the area that can cause you to suffer the biggest loss or hit a home run with the largest gains, is in the shape of the diamond.
All diamonds that are not Round Cut are considered Fancy Cut Diamonds. These fancy shapes can rise and fall dramatically in price because they are subject to an outside factor that does not really affect round cuts. That outside factor is fashion trends. Thirty years ago the most popular shape of diamond was the Marquise. Now, you can hardly give them away. After that, we saw a huge rise in sales of Princess cut diamonds. But as millennials begin to purchase, they don’t want the princess cut shape of their parents, and a perfect storm begins to brew. Some of the parents of these trend setters are beginning to face divorce, the death of a spouse, or for a myriad other reasons have a need or desire to sell. At the same time, diamond cutters find themselves sitting on princess-cut diamond inventory because it is difficult to see the coming shift in style. So the pre-owned inventory and overstock from manufacturers collide and, as in everything, supply and demand rule all, and the price of princess cuts plummet.
The good news is that this “fashion trend” factor works both ways. At the time this article is being written, larger oval shape diamonds (<1.50ct) are seeing premium prices. While diamond cutters and manufacturers focus on what the market is asking for, the winds quietly shift. Some celebrity somewhere dons an oval shaped engagement ring on the cover of some magazine and, just like that, everyone wants one. The problem is that the industry never saw it coming. We are under-supplied and, if you have one to sell, you may actually find yourself in a sellers’ market. Unfortunately, making these predictions can be difficult, to say the least, and for a young couple in love who are looking for the perfect engagement ring, thoughts about selling are like the future—distant.
What is important to take away from the above information is that, like anything you purchase, the best way to defend against value loss over time, lies in how you purchase. Time has clearly shown us that the largest increases in the long run, come from well-proportioned, round-cut stones in the high to mid-level qualities (D-H color and VVS2-SI1 clarity). If you want the convenience of a large chain or mall store, where you get “lifetime warranties” and seemingly unlimited credit, then you shouldn’t be surprised when you suffer a larger loss when you decide to sell. So, take the time to shop around. Look at the online diamond retailers who work with much less overhead and, therefore, smaller profit margins, or better yet, find a local diamond broker. Diamond brokers worth their salt will show you exactly what they are making. They will work for you, utilizing their vast network to find the best available value, while working on some of the lowest margins anywhere. This allows you to understand the realities of what you can expect if and when you decide to sell and minimize those losses. The bottom line is, if you want to protect your “investment,” have the foresight to do it at the time of purchase, because after that, you are at the mercy of the market.