Investing in What You Love

Whether ardent collectors are pursuing a bottle of Château Lafite Rothschild, a signed first edition by F. Scott Fitzgerald or antique Shaker furniture, many have experienced the thrill of the hunt and the rush of ownership that, frankly, shares of a mutual fund just can’t provide.

Yet a fresh focus on the financial dimension has crept into discussions of such "passion investments" over the past two years. Many owners of objects d’art have increasingly become "investor-collectors," strategically seeking items that may provide long-term returns along with short-term pleasure, according to the 2010 Capgemini and Merrill Lynch World Wealth Report. With the right approach and the help of your financial advisor, you can both find the liquidity to fund aesthetic interests and take into account the inherent risk of holding collectibles as bona fide investments.

The first thing to acknowledge is that the markets for artwork, rare wine, vintage automobiles and other collectibles are inconsistent and often illiquid. In many cases, future value depends on fashion and taste rather than cash flow and profits, so you won’t necessarily be able to sell the asset when you want to, or even know how much it might currently be worth.

While their markets may be unpredictable, real assets like collectibles should be included in personal net-worth calculations, especially if they make up a large chunk of your overall portfolio. They carry a unique risk and potential return profile, which you need to account for as you build a more accurate financial strategy. For example, if you find you have considerable wealth tied up in artwork — and even "blue chip" paintings can take time to sell at auction — you may want to balance that with greater liquidity elsewhere in your portfolio.

One way to do that is to look at all of your assets and liabilities to make sure you’re not overweight in "aspirational risk," which includes collectibles and other higher-risk investments such as large single-stock positions. You should make sure most of your assets can help you maintain your basic standard of living and your lifestyle — for example, investments in your home and a diversified portfolio of equities, fixed income and cash. Of course, investing involves risk and investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.

If your portfolio is too heavily invested in aspirational risk, you may want to adjust your strategy for your next big purchase. For example, you may decide to boost your cash or other liquid assets so you’re not over exposed to riskier assets or investments that can’t be unlocked when you need ready cash. The worst thing that can happen is to have to sell assets at a loss just to get some liquidity.

The art market may have begun to turn around, but markets for collectibles can still be uncertain, illiquid and highly emotional. And should the market for your collectible collapse, you may never be able to recoup your investment. As a result, investor-collectors should always rank financial reward below the thrill of, say, buying that sweet ’56 Ford T-Bird. Clever and astute collectors are conscious of the market value and the long-term investment worthiness of their acquisition, but their prime motive is passion.

Article written by Ash Rajan is U.S. Chief Investment Strategist, Investment Management & Guidance for Merrill Lynch Global Wealth Management

For more information, contact Jim Walsh your local Merrill Lynch Financial Advisor at (860) 728-3671 or http://fa.ml.com/james.d.walsh