Investing in rare coins has its temptations.

* A retired Boston lawyer looking for a new pastime cashed in his life insurance and bought a set of four 1890 gold coins for $3,400. Eleven years later, he sold the set for $110,000.

* A recent report -- widely touted by coin sellers -- from Salomon Brothers Inc. lists U.S. rare coins as the top performing investment category of the past 10 years, appreciating at a compound annual rate of more than 20%. Better than stocks, bonds, or orange-juice futures.

* Rare coins, as people in the trade will tell you with a wink, are a, well, private investment. Two years ago, the Internal Revenue Service began requiring precious-metal dealers to file reports on sales of gold and silver bullion, including such so-called bullion coins as South African Krugerands and Canadian Maple Leafs. No such rule applies to U.S. rare coin sales; what you report is between you and your conscience.

At first glance, the coin-collecting business seems pretty easy to understand. Every U.S. collectible coin is assigned a grade reflecting its condition. The highest grade is MS (mint state) 70, although numismatists say that virtually no MS 70s are to be had. For practical purposes, "gem" quality coins are graded MS 67 or MS 65. Prices vary widely, but often follow the grading. Recent prices on 1899 Morgan silver dollars, according to Massachusetts coin dealer Christopher Tracey, ranged from $90 for an MS 60 all the way up to $1,400 for MS 65s. Different segments of the coin market perform differently, says Tracey, but coins of a certain type and grade level tend to move together. In principle, that should give you a handle on reasonable risk-reward ratios.

In practice, alas, coins tend to be a little longer on the risk than on the reward. Take that Salomon Bros. report. What Salomon added (although a coin dealer might not) was that over the past five years, coins have gone up at a paltry 0.1% compound annual rate, ranking ninth out of a universe of 14 investment categories. Why were they so lucrative before? Think back to the high-inflation years of 1979 and 1980, when gold hit $850 an ounce. Pulled up by the hard-money craze, coins rose dramatically in value, only to plunge once the craze passed.

Now take that grading system. There is no Securities & Exchange Commission or Federal Reserve Board regulating the coin industry, so anyone who wants to can put up a sign, call himself a dealer or numismatist, and begin grading. The results can be confusing to the newcomer. One numismatist who represents a publicly traded coin dealer gave INC. several examples of apparently astronomical appreciation in his and others' private coin collections. When the examples were put to other coin experts, the reactions ranged from a verbal raised eyebrow to outright incredulity.

Talk to five different numismatists about the best rare-coin investments, and you get five different opinions. Morgan silver dollars, says one, minted from 1878 to 1921. Peace silver dollars, says another, minted from 1921 to 1935. Gold coins. Copper or nickel coins. At least Tom Becker, a senior numismatist with Bowers & Merena Inc., a coin dealer in Wolfeboro, N.H., is candid. "If I knew which coins would appreciate well," he says, "I'd buy them myself."

Numismatists do agree that you should plan on holding rare coins for at least 5 years and preferably 10 or 20. That gives you a chance for long-term appreciation, they say. More to the point, it minimizes transactions costs. If you buy coins directly from a dealer, you can expect to pay a 10% to 20% markup over wholesale price; when you sell them, you sell them at wholesale. Some dealers sell their coins to financial planners or other brokers, who in turn peddle them to clients. Depending on how many hands it passes through before it reaches yours, the coin you buy may cost as much as 45% more than the wholesale price.

In view of such uncertainties, many financial specialists are not exactly blinded by the allure of rare coins. "Rare coins are a beautiful hobby for collectors," advises Shep Harmon, president of Harmon Financial Management Inc., in suburban Boston, "but they scare me to death as an investment. There's too much potential abuse." Harmon tells of a client who was sold a misgraded coin by a salesman hoping to collect the higher commission that is standard on top-graded coins. The client assembled a portfolio of gold coins worth $10,000, or so he thought; when he sold the portfolio several years later, it fetched $2,500.

As a hobby, of course, coin collecting can be rewarding, and there are many reputable dealers around. The best, say the experts, belong to the Professional Numismatist Guild, an association based in Van Nuys, Calif., which screens its members and provides for disintersted appraisal in case of disputes over grading. Before you buy anything substantial from a dealer, ask how long he or she has been in business, and check out trade, financial, and credit references. Many dealers offer a 30-day or 45-day return privilege on every coin they sell, and some guarantee to buy coins back at the same grade for 15% or 20% off the current retail value.

Also, if you're serious about coin collecting, take a little time to learn about it. "Anyone can become a competent grader in six months if he or she is willing to study rare coins," says Beth Deisher, editor of Coin World, a weekly newspaper published in Sidney, Ohio. The coin collector's bible is A Guide Book of United States Coins (Western Publishing Co., Racine, Wis.). Coin Dealers Newsletter, published in Torrance, Calif., is geared toward the dealers' market and lists wholesale and retail coin prices.

And once you start a collection, be careful -- be very careful -- where you keep it. Remember that Boston attorney and his new hobby? When his wife returned home one day, coins were spread out all over the bed.These, it turned out, were the rejects, which a knowledgeable thief had considered and discarded. What the thief took came to some $40,000 worth of the attorney's best coins.

On top of the injury, moreover, came the insult. "The saddest part," the attorney laments, "was when I went to take a tax deduction on the loss. The casualty was valued at the original purchase prices of the coins."