The art market is on fire, and record-high sale prices are being shattered all the time. Late last year, Francis Bacon's "Three Studies of Lucian Freud" (whose works are also skyrocketing) sold for $142.4 million, making it the most expensive work of art ever sold. Right now the big money is in contemporary, modern and Impressionist art, as well as anything by the "great masters."
Historically, art follows a seven-year cycle, sometimes taking a dip because of the economy and sometimes due to big players bowing out, as the Japanese did in the late 1980s and early '90s. However, the art world is starting to see one fundamental change.
According to Philip Hoffman, CEO of The Fine Art Fund Group—the largest art investment and advisory firm in the world—the market is beginning to shift as people buy works as an investment in order to diversify portfolios.
Access is also transforming the space and driving the surge in prices. Heidi Zuckerman Jacobson, director of the Aspen Art Museum and incoming chair of the Young Presidents' Organization (YPO) Art Network, says that due to the broad expansion of art fairs, galleries and artists, buyers and sellers have multiple points of access to works like never before, creating the globalization of the art world.
YPO is a global network made up of more than 20,000 chief executives. (Disclosure: CNBC has an exclusive editorial partnership with the organization.) Jacobson sees YPO members taking a growing interest, with the group's art network growing to more than 1,000 members—a glimpse into the global interest among chief executives.
While only the 1 percent have the ability to buy and sell these high-priced works for a profit, the high-end market is giving the lower end a boost. Owners can see works they purchased for $20,000 selling for $100,000.
The problem is getting in and out at the right time.
"Works by young artists is a very volatile market; there is a lot of high risk," warned Hoffman.
Those who have been holding certain works are now in a bit of a conundrum. Art from the 19th century is falling due to a lack in popularity, and "brown furniture" works from the late 19th and early 20th centuries have plummeted over the last 20 years.
Brown furniture is an industry term referring to heavy dining, bedroom and other sets crafted of dark woods such as walnut. "If you bought a piece of brown furniture for $200,000 in the last 20 years, the value could have dropped to $40,000 or $50,000," Hoffman said.
The dilemma for owners of works such as brown furniture is that values will eventually go back up—but not for another 30 to 50 years, said Hoffman. That means those who are older have to decide to either cut their losses and sell for the extra cash in retirement or hold in the hopes that prices will rise and, at the very least, will it to their heirs.
Owning works of art sounds like it is out of reach for everyone except the megawealthy. However, some individuals have had amazing success when it comes to selling off works they have owned for decades. Perhaps the most famous example is the collection of Victor and Sally Ganz.
The couple owned and operated a small costume-jewelry business and, starting in the 1940s, began purchasing art for the love of it, mostly "on the cheap," for just a few thousand dollars per piece. The bulk of the Ganz's collection was sold off in 1997 after their deaths—netting their heirs $183.8 million at a single auction.
The return on their investment is astounding. A study by William Landes, professor emeritus of law and economics at the University of Chicago Law School, found that if the Ganzes had invested $7,000—the same price they paid for a famous Picasso—in large-company stocks back in 1941, their investment would have been worth $7.9 million by 1997.
By contrast, the Picasso in question sold for $48.4 million the same year. Interestingly, if they'd invested solely in small-company stocks, they would have had a portfolio worth $47.8 million—close to the painting's selling price.
For those considering investing, there is an element of "buyer beware," as art can be a risky asset class that, in the long run, might not get the best of returns.
A recent international academic study (by scholars from Emory and Stanford universities in the U.S. and Erasmus and Luxembourg universities in the EU) found that the value of fine art tends to be overvalued and that the actual average annual return of art is around 6.5 percent. The study looked at more than 20,000 paintings that were repeatedly sold from 1972 to 2010.
This means that investors could potentially get a better return by putting their money elsewhere. For example, Vanguard looked at data starting in 1926 and found that portfolios with a traditional 60 percent stock, 40 percent bond split has an average annual return of 8.6 percent.