How to Allocate a Warhol

Record prices have many investors looking at their collections for returns. But how should a masterpiece fit in your portfolio? Here, an updated look at art as an asset.

  • Viewpoint
  • January 2014

When the hammer descended on two weeks of daytime and evening auctions of postwar and contemporary art at Christie's and Sotheby's in New York last May, the tally for the annual event topped $1 billion, almost matching the reported $1.2 billion paid at the two famous auction houses in all their contemporary sales worldwide for the whole of 2010.

The remarkable sum is the latest indication that we are in what experts are calling a new era of the art market, one where it's not only the new rich from countries such as India, China and Russia who are driving up prices, but "ordinary" collectors — investors with portfolios in the millions, or tens of millions, who have a passion for art and want to invest some of their wealth in tangible assets — who are also getting into the art-as-an-asset game.

This Viewpoint, an updated version of a popular article first published in February 2012, delves into the art of investing in fine art and important considerations when doing so. Experts note that buying art requires careful thought: It's unpredictable, highly illiquid and may not always bring big returns. Art is also subject to changes in fashion, and unlike traditional asset classes, such as equities or bonds, it is difficult to accurately value.

If you're thinking of adding an art investment to your portfolio, the Merrill Lynch Wealth Allocation Framework, which is outlined in the piece, may help you. It divides all your assets into three distinct "buckets," which, roughly speaking, are conservative, reliable investments aimed at meeting your essential goals; assets with greater risk and potential to beat the markets; and a third category where art fits in: aspirational investments that satisfy an aesthetic or personal goal and might (but very well might not) result in a substantial change in your wealth.

The article also stresses the importance of engaging an art advisor who has deep knowledge of the market. This is especially true for novice investors looking to build a portfolio of art. An expert can guide you when it comes to determining a fair price and distinguishing a great work from one that isn't the best example of an artist's oeuvre.

Another important message from the experts: Buy something you like, rather than purely seeking out a work for its investment potential. Finding the intersection of those two factors may be one of the most important aspects — and biggest thrills — of collecting, they say.

"We ask a potential collector, 'What is it that you like, and would want to pass on to heirs?'" says Jeff Rabin, co-founder and principal of Artvest Partners, an independent art advisory with a financial focus. "With the right guidance, you can enjoy some of the most exciting works in the history of art."

That's a return that can't even be calculated.

Click here to read the full Viewpoint

Past performance is no guarantee of future results.

The opinions, assumptions, estimates and views expressed are as of the date of this publication, are subject to change, and do not necessarily reflect the opinions and views of Bank of America Corporation or any of its affiliates. The information does not constitute advice for making any investment decision or its tax consequences and is not intended as a recommendation, offer or solicitation for the purchase or sale of any investment product or service. Before acting on the information provided, you should consider suitability for your circumstances and, if necessary, seek professional advice.

Nonfinancial assets, such as fine art, can be complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

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