Wealthy Cling to Art and Other Treasures in a Low-Return World
Stock portfolios in recent years have provided scant comfort. All too often, those share prices on a computer screen -- who even has paper stock certificates anymore? -- are the difference between a good night's sleep or pacing yourself into a flop sweat. Even when the numbers do go up, volatility seems to drag them down. That has wealthy investors longing for tangible assets -- something they can showcase in their living rooms, drive through their towns in, or even wear from time to time.
Just last week someone paid more for a car than has ever been spent before, when a 1962 apple-green Ferrari 250 GTO sold for $35 million in a private sale. Also in May, Edvard Munch's painting "The Scream" sold at auction for a record $120 million -- in 12 minutes. And in December of last year, Elizabeth Taylor's jewelry collection set a world record at $157 million.
The world's millionaires are devoting an average of 9.6 percent of their fortunes to nonfinancial assets like collectibles, a new survey by Barclays Wealth shows. Nearly every category of "treasure assets" attracted new buyers in the past five years. The poll of 2,000 people with investable assets of $1.5 million or more, conducted by Ledbury Research, found that 49 percent of respondents own fine art pictures and paintings, up 8 points from 2007. Also drawing a trove of new collectors were precious jewelry, antique furniture, precious metals, wine, rugs, sculptures, classic automobiles and coins.
The eye-popping sale results of the past year may stimulate more buying. Buyers figure they are getting not only a beautiful object but also an investment insulated from volatile financial markets. "Because we're in a low-return environment, people view art as a good place to park money," says Marion Maneker, publisher of Art Market Monitor.
Just as Americans overspent on homes in the past decade, lovers of art, wine and other collectibles may be mistaking the fun of treasure hunting for a smart investment, says Christopher Didier, managing director at Robert W. Baird & Co.'s private asset management group. As prices go up, such "investments" can seem like no-brainers, he says. Then, invariably, someone kills the music and turns up the lights. "Reality hits," he says.
The problem with owning something tangible and valuable: Like most things -- with the exception of college books, children's toys and your grandmother's CorningWare -- you can't just stuff it in the basement. Precious things are pretty precious and require maintenance and money.
Aside from auction or gallery commissions, collectors must pay for storage, security, insurance and transportation. Insurance on $1 million in art, antiques or rugs tends to cost $600 to $1,800 a year, according to Martin Hartley, chief operating officer at Privilege Underwriters Reciprocal Exchange, or PURE, a specialist insurer for high-net-worth customers. And installing a good, basic alarm system can cost $1.50 for every square foot protected, says Gary Raphael, senior vice president for risk consulting at ACE Private Risk Services.
Yet the costs of securing and storing possessions can pale in comparison with the risks of resale markets. The art market can be just as volatile, irrational and bewildering as the stock market. While exceptionally great pieces are selling at peak prices, good isn't good enough, Maneker says. "It's very hard to sell stuff that is really good, as opposed to insanely good."
To make matters worse, that abstract painting that some investor may have spent a year and a small fortune acquiring may end up boring his kids or creeping them out. That's nothing compared with how unhappy they'll be when they discover they have to pay taxes on it. Often the younger generation has no interest in acquiring the older generation's precious objects, and estate taxes can be high on these items, says Daniel Egan, a behavioral finance specialist at Barclays Wealth.
Still, people continue to collect, with the youngest millionaires pouring more of their fortunes into collectibles. On average, survey respondents in their 30s put 12 percent of their net worth in treasure assets, while those in their 60s and 70s devoted just 4 percent.
Perhaps what people are really investing in when they acquire works of art, fine wines, or rare coins isn't something that appreciates in value; they're just something collectors appreciate, along with the pleasure of the treasure hunt. The survey found only 18 percent of treasure is owned "purely as an investment." Having a motive other than moneymaking may come in handy. Says Milo Benningfield, of Benningfield Financial Advisors in San Francisco: "When you start mixing business and pleasure, usually one or the other suffers."