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Beware the 'Fairy Tales' of Art, Wine and Jewels

"Tete" carved by Italian sculptor and painter Amadeo Modigliani
Miguel Medina | AFP | Getty Images
"Tete" carved by Italian sculptor and painter Amadeo Modigliani

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

It’s fine if you buy a painting or bottle of wine purely for enjoyment. That in fact may be the best and only reason to buy a collectible. But those who buy collectibles for financial return or as a hedge against global financial uncertainty may be in for a disappointment.

Here are some reasons cited by Barclays:

EMOTION – When investors become emotional, they tend to make bad decisions. Investing in collectibles can be far more emotional than buying stocks, since buyers can “all too easily let their heart rule their head.”

HIDDEN COSTS -- Buying a vintage car can cost hundreds of thousands of dollars. Yet fashions can change quickly in the car world, and can depreciate rapidly due to even the most minor dents, rust, or scratches. “The cost of upkeep, maintenance and insurance can be considerable,” Barclays says.

OPAQUE MARKETS – Knowing the true market value of collectibles is more a, well, art than science. The Mei Moses All Art Index covers paintings mainly sold at auction in New York and London, a tiny sliver of the art market. Plus, the index suffers from selection bias, since it doesn’t cover works that failed to make it to the auction block.

CORRELATION – The idea that collectibles are not correlated with broader financial markets is dubious. When financial markets fell in 2008, the art market also slipped – and rebounded quickly with stocks. A comparison of art prices and the London Stock Exchange going back to 1765 shows “a strong positive relation” between the two, according to one study.

ILLIQUID – Wine is more liquid than art (financially speaking). But in the art world as in other collectibles markets, “trading volumes are extremely thin” and it can take 30 years or more for a work to return to the auction block.

Of course, buying collectibles can be an important part of a wealth portfolio. But people should buy them to enjoy now – not to profit from later.

-By CNBC's Robert Frank
Follow Robert Frank on Twitter:
@robtfrank