Diversifying your investments doesn't just mean balancing your portfolio wisely between stocks and bonds. You can also include alternative assets, such as art, in your portfolio.
Collecting and investing in art is no longer limited to the wealthy elite. If you're into art, you can diversify your assets or find something nice to hang on your wall. At the very least, your investment will look a lot better than stock certificates.
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Is art a good investment?
Is art a good investment?
Investing in art can often be expensive, but it can still be a worthwhile addition to your portfolio.
The art market is not very correlated with the stock or bond markets. This is exactly what investors should look for when diversifying their assets. Whether financial markets are trending up or down, the art market is less affected. While both stocks and bonds fell in the first half of 2022, art auctions recorded new record prices.
The Art Market faced a challenging environment in 2020 as the COVID-19 pandemic led to the cancellation of in-person auctions. Contemporary art sales fell by 34%, only to recover as many auctions and galleries moved online. Sales and transactions reached record highs, with more artworks being sold than ever before.
As we face the highest inflation rates in the last 40 years, art serves as a good hedge against inflation. People with large amounts of cash on hand are looking to buy hard assets like art and real estate to protect their wealth. As a result, auction prices have risen significantly during the recent period of high inflation.
This trend bodes well for the future of art as an investment. Still, investors should be careful not to be seduced by the high returns that can theoretically be achieved by investing in fine art.
Selectively, it is possible to generate positive returns from investing in art, by diversifying collections and holding artworks for the long term. Art investors should expect bond-like returns, rather than the above-market returns touted by art indexes.
What you need to know before investing
What you need to know before investing in art
When you invest in a work of art, you buy it in the expectation that demand for that work, or similar works, will increase faster than supply. If that happens, the value of the work will increase, and you may be able to sell it at a profit.
That's easy to say, but hard to do.
- Choosing an artist can be difficult. You're unlikely to discover the next big artist before they gain fame and start commanding high prices for their work. And sadly, works by living artists don't sell for the same prices at auction as works by dead artists. You also can't go to your local antiques store and find an authentic Monet, Modigliani, Matisse, or Munch for a few dollars. It would cost millions of dollars to buy these artists' works at auction.
- You may have to put your work on hold for a while. Even if you are able to acquire pieces that will increase in value, the art market is relatively illiquid: you usually have to wait to sell, and if you want to make a profit on your investment, you have to pay expensive commissions to brokers or auction houses to sell your holdings.
- Art requires maintenance. Art is generally a tangible asset. Unlike intangible assets, such as retirement accounts, artwork takes up physical space. To maintain its value, artwork requires care and maintenance. When displaying artwork in your home, you need to be mindful of temperature, humidity, sunlight, and a variety of other factors that can deteriorate your artwork. For a fee, you can hire a storage company to store your artwork in a temperature-controlled environment.
Other costs to consider when buying or selling art include sales tax, shipping costs, certification and appraisal fees, insurance, etc. You may also need to purchase a nice frame or another type of display device for your artwork.
How to start investing
How to invest in art for the first time
You can easily find artworks to buy from galleries and auction houses (both brick-and-mortar and online). Visit your local art fair. Online magazines and social media channels like Instagram can help you discover artists you like and even buy work directly from the artist's website. Or you can dive into the world of NFTs, which represent ownership of digital art.
There are several ways to invest in art, each with different degrees of risk and reward.
- High risk and high price: You could also buy original artworks at auctions, galleries, and art fairs, but that also carries the highest price tag and the highest risk. Try buying work by up-and-coming artists in the hopes of finding the next Banksy. A unique painting or sculpture may one day be worth much more than you paid for it, or it may be difficult to resell.
- Low risk, low cost: As an alternative to purchasing the original work, you can also purchase a print of the original painting or drawing. Many artists and galleries create limited edition prints of some of their works and offer collectors the opportunity to purchase the prints on their websites at the full price. High-quality limited edition prints can be very valuable and cost a fraction of the price of the original. However, because prints are not usually unique, they will not increase in value in the same way as the originals.
- Low risk but high price: You can also buy works by “blue chip” artists, such as Andy Warhol. These works generally hold their value better, but experience less capital appreciation and appreciation. Blue chip artists are artists whose works tend to be the most stable in value and are not subject to trends or speculation. Many beginning investors cannot afford to buy blue chip paintings and sculptures, but some funds allow investors to buy shares in holding companies that buy blue chip art. (More on this later.)
The point is, when buying an individual work of art, you probably want to buy a piece that makes you happy. If you invest $10,000 in a painting that you think is ugly just because you expect it to appreciate in value, you're missing out on the fun of investing in art compared to other asset classes.
Image source: Getty Images
Other ways to invest
Other ways to invest in art
If you want to avoid the hassle of owning artwork, it is still possible to invest in art without owning any physical assets.
Structured much like other investment funds, art funds allow investors to own portions of artworks. For example, MasterWorks is a fund manager that purchases prestigious artworks at auction on behalf of investors. The company sets up a holding company for each piece of art and makes a profit by acquiring, storing, promoting, and reselling the artwork. The company registers the company with the Securities and Exchange Commission and issues shares to people who want to invest in specific artworks.
Securitizing art in this way makes art investment more accessible and also increases the liquidity of the art stock market: investors can buy and sell shares much more easily than they can buy and sell physical artworks.
Companies like Masterworks conduct research to identify works of art likely to increase in value and oversee the maintenance needed to keep the artworks in pristine condition, but investors pay a service fee and don't get to physically own the artworks.
Unfortunately, there is no such thing as an art exchange-traded fund (ETF) or mutual fund. The illiquidity of the art market makes it impractical to concentrate an ETF or mutual fund on art. Art's specificity and inherent rarity means that fund managers cannot simply buy Renoir or Basquiat paintings to satisfy growing investor demand. Similarly, if many of an art fund's shareholders wanted to redeem their shares, the illiquidity of the art market would prevent the manager from easily selling the fund's assets.
Can I buy ETFs or mutual funds?
Art Index
Sotheby's, Christie's and other firms that sell art as an investment often cite Art Market Research's Art 100 Index as the basis for their opening bids. The index tracks sales of works by 100 artists from different regions, styles and eras at 22 auction houses around the world, and can give a rough idea of how the global art market is performing.
In 2018, Artprice launched the Artprice 100 Index, which focuses on blue-chip artists. According to the company, the index grew at an average annual rate of 8.9% from 2000 to 2017. S&P 500 Over the same period (notably starting just before the dot-com bubble burst and including the Great Recession), growth was less than half that amount. However, the S&P 500 outperformed the Artprice 100 every year from 2015 to 2020. The index also outperformed in 2021 and may outperform in the first half of 2022, although data is not yet available.
However, these art-focused indices have several problems. First, they only take into account the auction price of the artwork sold. They ignore all costs associated with investing in art. If the artwork sells for less than the amount of its initial cost (including sales tax, transportation, and appraisal costs), the sale price of the artwork may not generate a profit.
The second problem is a phenomenon called “selection bias.” Art market prices are not updated every moment or even every day, like the prices of securities traded on financial markets. Art indices are based on available auction data. If art never sold, there would be no data. And since works that never go to auction are often worth less than their most recent sales prices, the index's record returns are higher than the art market as a whole. Indices are biased to reflect only winners.
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Where to find art to buy
You can find art for sale almost anywhere. Go to your favorite local coffee shop and there's a good chance you'll find art hanging on the walls available for purchase.
- Physical Store Gallery: Investors looking for art should not ignore art galleries. To make a profit, galleries charge high prices, which investors may see as a waste of money. However, galleries also provide the service of promoting artists and displaying their work in museums. Investing in an artist is proof that the gallery considers the work a valuable contribution to art. Therefore, the artwork may be worth more monetary value than a painting hanging on the wall of a coffee shop.
- Online Gallery and Auction House: You can also buy art on the Internet through online galleries and online auction houses. Large auction houses, such as Sotheby's and Christie's, accept bids online. You can also find smaller, more exclusive online galleries and auctions with a quick web search. Be sure to research the reputation of an online art dealer before bidding or buying. Many artists sell directly to customers through their own websites.
Who should (and shouldn't) invest in art?
Before you decide to put your money down to invest in a piece of art, there are a few things you should consider.
Investing in art may be a good option if you::
- You have a passion for art, an appreciation for it, and a drive to explore it.
- I have an established portfolio of other investments and am looking to diversify my assets.
- You have a high risk tolerance.
- You want to own a piece of art indefinitely.
- You can afford the maintenance and insurance of the artwork you purchase.
Avoiding art as an investment:
- We expect returns to exceed those of the stock market.
- I'm not interested in exhibiting the artwork I purchased.
- You want to be able to convert your holdings into cash quickly and easily.
Investing in art is not for everyone. The risks are high, and investors shouldn't expect huge returns from even a diverse collection of works. But if you buy art that makes you happy, at least you'll have a piece that you love and are proud to display. If the art piece increases in value significantly, you can sell it for a tidy profit and use the proceeds to redecorate.
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