As the market volatility continues—with upswings one day and dramatic drops the next—unpredictability has become the “new normal.” But rather than poring over indices or grasping at indicators, investors can look for other ways to help their wealth appreciate. Taking advantage of Northern California’s renowned wineries and flourishing art communities, some Bay Area investors have turned to luxury collectables such as art and wine to add depth to their traditional high-net-worth portfolios. As global demand for collectables has grown over the years, art and wine have become appealing to investors because they don’t directly correlate with the fluctuations of the stock market.
But building a valuable collection isn’t as simple as purchasing a few expensive items. Just like stocks, art and wine have their own market risks, unique considerations and requirements. Whether you’re investing in a Burgundy or a Banksy, there are different factors to consider when building your own collection of tangible luxury assets.
Preparing your portfolio. The global art market is growing, with the latest figures from the European Fine Art Foundation (TEFAF) suggesting it amounted to €46.1 billion (about $59.7 billion) in 2011, including public auctions and estimated private sales. There’s been a driving demand for wine and art from Asia, particularly China, where investors have started to dedicate funds to high-end wine and rising Chinese artists. This, in turn, has enabled the country to expand its domestic art market and increase visibility of possible international art investment opportunities. Millionaires in nearby Silicon Valley have also started to invest.
Because the art market can be unpredictable and is subject to taste and trend, art should not be the primary focus of a long-term financial strategy. While International Wine and Spirit Research currently forecasts growth for wine demand to increase by 40 percent over the next three years, demand has also slowed in the past couple of years due to the Japanese tsunami in 2011, political unrest in the Middle East and economic uncertainty in Europe. However, art and wine are a worthwhile investment consideration while prices are lower.
Before considering an investment in art or wine, you should evaluate your portfolio to ensure you have a considerable amount of capital. Consult with your financial adviser to determine if it’s an appropriate investment for your overall portfolio and aligned with your financial goals—both short-term and long-term. The adviser will be able to best integrate this alternative investment into your portfolio to keep your wealth on track to meet goals, and can also help you identify where collectables fit among your assets.
An additional consideration is to enlist expert advice from a consultant who can determine what vertical of collectable would work best for your specific situation. Identify where your collectables will be stored and who can take care of them prior to purchase. Especially for wine, a bonded warehouse can help mitigate risks such as unwarranted attempts to open a bottle to check on the wine’s maturation. For art, you’ll want to make sure there’s an appropriate environment for it to either be stored or displayed.
Investing in wine. Gaining credibility, wine has become an asset that many investors have been able to personally enjoy and profit from. Especially in the Bay Area, investing in wine can be a hobby, trade or business. Because interest in wine has expanded to Asia, wine investors have received higher levels of return over the past few years. Unlike other types of investing, wine investors can enjoy tastings, vineyard tours and dinners as a way of researching their potential assets. But like any investment, investing in wine involves risk, and past performance does not guarantee future returns. Investors may get lucky buying a few great cases, but having a wine fund can minimize overall risk.
Once you’ve prepared for how wine will fit into your portfolio, it’s time to identify what types and how much you’d like to purchase. A general rule of thumb is to buy the best wine you can afford in small quantities. Larger quantities in cases can cost you annual insurance and storage charges. Other factors to consider include age, vintage and familiarity. Setting up a “cellar tracker” can help you keep a close eye on your purchases and when each bottle should be consumed.
Investing in art. Art has become an attractive investment option during a fickle global economy. While investing in art doesn’t offer a regular income like stocks can with dividends, it can be a source of liquidity. You can expand your art portfolio through your current pieces by selling them to purchase new pieces. However, timing plays a key role in when you sell or purchase art, as the price of the work you want to sell may have dropped when you need the cash.
It’s also important to have an understanding of the subjective aspects of the art market. By educating yourself through research and speaking with an expert, you can gain an understanding of the art market and what your own interests are. An art adviser can offer insight into how art and its values have changed in the short- and long-term. Keep in mind that different pieces carry their own distinct levels of risk. For example, unknown emerging artists may yield more risk than established, well-known artists, but offer ample opportunity for new investors to enter the art market. An art collection can be an exciting and visual investment, as well as provide a wonderful opportunity to visit galleries. By seeking the right advice, you can ensure you’re collecting valuable works that fit your circumstances.
The best part about investing in collectables is you’ll ultimately end up with a tangible investment you can enjoy. If it hasn’t appreciated the way you anticipated, it’s still a unique way to diversify your portfolio through your personal interests. Whether it’s touring a winery or an art gallery, investing in a luxury asset can be its own enjoyable experience. Obtaining firsthand experience in each market is crucial to finding an asset that you know well enough to foresee increased demand.
With the proper research and knowledge, you can identify investments of passion that can store your wealth and potentially increase in value over time.
Rich Hogan is a private wealth adviser for Merrill Lynch, Pierce, Fenner & Smith Inc. , a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corp. You can reach him at (415) 288-2505 or rich_hogan@pbig.ml.com.
