Diversifying your Portfolio: Is Art as an Investment a Good Fit?
Is Art a Good Investment?
Collecting art has long been viewed as a hobby for the financial elite. However, if you’re interested in art, there may be a way to fuel that passion, and further diversify a portion of your portfolio.
Art adds a level of diversity to your portfolio because the market for art is not highly correlated with the stock or bond markets. No matter how the financial markets are performing, the art market isn't traditionally affected. For example, in the first half of 2022 as stocks and bonds were declining, record prices were being set at art auctions.
Art can also serve as a good hedge against inflation. If you have spare cash on hand, hard assets, like art and real estate can be good investment vehicles to protect wealth. This is why auction values tend to increase during times of high inflation.
Still, it’s important not to let your personal taste or artistic passion get in the way of profitability. It’s easy to be enticed by the idea of high returns that may not materialize for a very long time, if ever.
Income From Art
It’s possible to generate positive returns from investing in art but you will have to be disciplined. It’s important to understand the difference between a potentially profitable investment in art and building a personal collection of art you appreciate. For the purposes of this article, we’re discussing art as part of your investment strategy. In some cases, that may mean you can own a piece of art, or a portion of it, without ever taking possession of it.
To invest in art you should expect to
Diversify your collection
Be able to hold pieces for the long-term
Expect conservative returns more comparable to bonds
You should avoid art as an investment you expect to
Get returns that outpace the average long-term return of 10% in the stock market
Be able to liquidate your holdings quickly and easily.
What to Know Before Investing in Art
When you invest in art, you're counting on the likelihood that the demand for that piece or similar pieces will increase. If that happens, you may be able to sell it for a profit.
Sounds Simple Right? It Isn’t.
Choosing the right artist is an art. Odds are you're very unlikely to discover the next big artist before he or she can start putting high price tags on their work. Also, despite how much you might appreciate the works of living artists, the morbid truth is the work of dead artists always draws more at auction. You’re also unlikely, despite searching, to find a rare deal on a famous piece by a famous artist.
Art Costs More than the Purchase Price
Art is a tangible hard asset that takes up physical space. Unlike a retirement portfolio, art requires care and maintenance to retain its value. If you opt to store the art in a climate-controlled environment there will be an obvious cost. If you prefer to display the art, you may need to budget for modifications in your home. Temperature, humidity, sunlight, and other factors can degrade the quality of your art and your investment. There are also some less obvious costs to factor into your decision. Any purchase will come with sales tax. There’s also insurance, and appraisal fees. Don’t forget too, that on the day you put your item up for auction, the auction house will be taking a hefty commission.
How To Make Your First Investment In Art
There are several ways to invest in art, each with varying degrees of risk and reward.
1. High risk and high cost: You can buy original works at galleries and auctions, but this is where you will run into the highest price tags. You can also try to buy a work by an up-and-coming artist, hoping you've discovered the next Haring, or Warhol. But that feels more like the luck of a lottery than a careful investment strategy.
2. Low risk and high cost: You can buy pieces by famous "blue-chip" artists. These types of works, by artists like Hockney, Banksy, or even Matisse have the most stable value and are less subjectable to the fickle nature of art.
3. Low risk and low cost: Instead of buying an original, consider a print of an original painting or drawing. A high-quality, limited-edition print can be very valuable and costs a fraction of the price of the original. But, since prints usually aren't unique, they don't increase in value in the same way as the originals.
4. Low risk at any cost: If you find it difficult to swallow the price of a blue-chip piece of art, or you’re simply not interested in possessing the art, there are several funds (ex: masterworks.com) that enable investors to buy shares in a holding company that will buy a blue-chip piece of art.
The Bottom Line on Art as an Investment
Investing in art isn't for everyone. It carries a lot of risk, and investors shouldn't expect huge returns, even from a diversified collection of works. But if you buy artwork that makes you happy, at the very least you'll own pieces that you love and can proudly display. If you buy into a fund, you can eliminate many of the difficulties of owning art, but still have every right to be a proud owner and supporter of work you value.