Are you tired of the same old investment options? Looking to add a touch of creativity to your portfolio? Then it’s time to consider the fascinating world of art investing. As an alternative asset class, art offers a unique opportunity to diversify your holdings and potentially achieve impressive returns.
While art investing may initially seem daunting, fear not! In this beginner’s guide, we’ll walk you through the ins and outs of investing in art, equipping you with the knowledge and resources to make smart decisions in this captivating market.
So, if you’re ready to explore the intersection of finance and aesthetics, let’s dive into the exciting world of art investment!
Table of Contents
Benefits of Investing in Art
1. Record Breaking Sales
Recent auction sales have brought the spotlight back to the fine art market, with Andy Warhol’s painting ‘Shot Sage Blue Marilyn’ (1964) selling for a mind-boggling $195 million in May 2022. This not only showcases the incredible value fine art can hold, but also illustrates the potential financial gains available in this market.
2. Art Market Resilience
Despite the pandemic, the art market displayed impressive resilience, surpassing pre-pandemic sales levels. The 2022 annual report by Art Basel and UBS Global Art showed a strong recovery in art sales, jumping to $65.1 billion in 2021, a 29% increase from 2020. This goes to show that art is a durable asset class, capable of weathering economic storms.
3. Protection from Market Risk
When investing, one must always consider the risk factor. Traditional investments, like stocks and bonds, are subjected to market risk. However, artwork stands apart. Its value doesn’t fluctuate with stock indices or market movements. It acts as a store of value, separate from traditional asset movements, offering investors a buffer from broader financial shocks.
4. Low Correlation with Other Assets
A 2022 CitiBank report showed that the correlation between art and other asset classes is either weakly positive or close to zero. This means that the performance of art investments does not strongly tie with the performance of other financial investments. This provides portfolio diversification, reducing potential risks and increasing chances of capital appreciation.
5. Art Appreciates Over Time
Unlike many hard assets that depreciate over time, art has the unique quality of potentially increasing in value the longer it is held. A centuries-old painting today may be worth a lot more than when it was originally created. Investing in art can therefore offer long-term value appreciation.
6. Strong Return on Investment
The Masterworks.io All Art Index recorded a 28.2% return from January 2020 through June 2021, putting it in the same league as publicly-traded risk asset classes like developed market equities, emerging market equities, and commodities. This indicates that art investment can deliver comparable returns to traditional investments.
7. Inflation Hedge
Art tends to fare well during periods of high inflation. Research from Masterworks shows that during periods of inflation equal to or higher than 3.0%, Post-War & Contemporary art prices had an average real price appreciation of 23.2% from 1985-2020. This suggests that art can serve as an inflation hedge, preserving the purchasing power of your wealth.
8. Aesthetic Enjoyment
Lastly, beyond financial returns, art provides a sense of joy and aesthetic pleasure that other forms of investment simply can’t match. Owning a piece of art is about more than just the potential monetary gain; it’s about appreciating beauty, supporting creativity, and immersing oneself in culture. This unique feature of art investment brings an intrinsic value that can’t be quantified.
Risks of Investing in Art
1. Illiquidity
Like classic cars and real estate, artworks are highly illiquid assets. This means that they cannot be easily sold for quick cash. Finding a buyer for your artwork can be challenging, and even more so if you’re trying to sell on short notice. Art investment should be part of a long-term strategy rather than a quick flip.
2. High Initial Investment
Art that’s worthy of investment often carries a hefty price tag. Yes, there are options like art investment funds and fractional shares that allow investors to get a piece of the action without breaking the bank. But if you’re considering buying art outright, be prepared to shell out significant cash for a valuable piece.
3. Maintenance and Hidden Costs
Owning a piece of art doesn’t just involve the initial purchase price. There are additional costs for handling, storage, insurance, and maintenance. Over time, these costs can add up, and may even need to include restoration expenses to keep the artwork in prime condition.
4. Risk of Counterfeit Artworks
The art world, unfortunately, is riddled with counterfeits. If you’re not an expert in appraising art, you could easily fall prey to such scams.
To mitigate this risk, you might need to enlist the services of experts or reputable third parties, like auction houses or certified appraisers. Investing in art funds or fractional shares can also help you sidestep the problem of authenticity.
5. Limited Market Information
Unlike stocks and bonds, the art market does not have a wealth of publicly available information. Many art transactions are private, and details about the sale are often undisclosed. This lack of transparency makes it difficult for investors to make informed decisions.
6. Challenges in Valuation
In the world of art, no two pieces are exactly alike. This uniqueness can be a boon when it comes to aesthetic appeal, but it poses challenges when trying to ascertain the value of an artwork.
There are numerous factors to consider, including condition, originality, rarity, and more. Even if a similar piece of art has been appraised at a certain price, it doesn’t guarantee the same valuation for your artwork. This inherent unpredictability can make art investing a risky venture for the uninitiated.
How to Invest in Art
1. Investing in Individual Works
If you crave the allure of possessing an artwork that adorns your living space, investing in individual works is an excellent choice. You can purchase art through auctions, art fairs, or by working with a dealer.
The world of art is diverse, so it’s essential to research leading artists, their markets, and growth potential. One must not forget the importance of buying artwork that resonates with you because it might also appeal to other buyers.
While you’d typically want artwork that has been traded multiple times to understand its growth rate, remember that the love for art itself is crucial, even if you intend to hold onto it for years. Past performance and comparable pieces from the artist can help you predict your investment’s potential return.
2. Art Funds
While traditional investment platforms lack art-specific funds, art fund offerings are increasing. Platforms such as YieldStreet let you invest in blue-chip art, an art category akin to blue-chip stocks, encompassing works from master and mid-career artists. YieldStreet acts as a robo-advisor, managing and insuring your investment, boasting a net annualized return of 12.2%.
3. Fractional Shares
Top-tier artworks can cost a fortune, rendering them unreachable for many. However, platforms like Maecenas and Masterworks offer a solution – fractional shares. With as little as $1,000, you can buy a portion of numerous valuable artworks, allowing you to diversify your art portfolio without breaking the bank.
4. Digital Art and NFTs
The digital art market is burgeoning, especially with the rise of Non-Fungible Tokens (NFTs). NFTs are unique, non-physical digital artworks traceable and verifiable on a blockchain network. Blockchain supports transparency, authenticity, and liquidity, making it seamless for NFT investors to trade artworks.
NFT sales have skyrocketed from $4.6 million in 2019 to $11.1 billion in 2021, indicating the immense potential of this new investment avenue.
Masterpieces from legends like Leonardo da Vinci and Vincent van Gogh are available as NFTs, but the platform also provides access to works from emerging artists like Beeple, whose digital collage sold for a staggering $69.3 million.
Getting started with NFTs is straightforward: visit an NFT marketplace like OpenSea, create a digital wallet, fund it with cryptocurrencies, and bid for your favorite art piece.
5. Related Stocks
Another intriguing way to capitalize on the surge of digital art, especially NFTs, is to invest in related stocks. Artists use design software like Adobe Illustrator or Photoshop to create their artworks.
By investing in Adobe Inc. (ticker: ADBE) and similar stocks, you can reap benefits from the burgeoning popularity of NFTs without diving directly into cryptocurrency or blockchain technology.
Investing in art has evolved to accommodate various budget sizes and risk appetites. Whether you desire to own physical artwork, are interested in art funds, fractional shares, or NFTs, or prefer investing in related stocks, there’s an option for everyone in the dynamic world of art investment.
Considerations Before Investing in Art
An alluring combination of culture, history, and potential financial returns, art investment can seem like an enticing prospect. However, like all investments, art comes with its own set of unique considerations.
Your Relationship with Art
Art investing isn’t just about financial gain – it can be a deeply personal journey. If you already have an appreciation for art, you’ll likely find this journey rewarding.
You might already have knowledge about different art periods, artists, and techniques that can inform your investment choices. Even if you’re a beginner, your eagerness to learn could propel you toward successful art investments.
The Health of Your Current Portfolio
Art is an alternative investment, meaning it doesn’t fall into traditional asset categories like stocks or bonds. This also means it can be more volatile and carry higher risk. Ideally, consider art investment once your portfolio is well-diversified and secure.
The capital you put into art should be funds you’re prepared to lose or have tied up in a less liquid investment for several years. Your art investments should be the cherry on top of a robust, risk-mitigated portfolio.
Have a Plan for Your Art
Like all investments, an exit strategy is crucial when investing in art. Consider when you might want to sell the piece and how you might do that. However, the art market can be unpredictable – sometimes, you may not be able to sell your piece for what you paid.
It’s a good idea to ask yourself if you would be content owning the artwork long-term if you can’t find a buyer. This is where a genuine love for art can transform a seemingly bad investment into a joyful part of your home.
Understanding the Risks
Investing in art is not for the faint-hearted. It’s an exciting world that merges finance with culture and aesthetics, but it requires due diligence and a measured approach. Understanding and accepting the risks is an essential first step on your art investment journey.
So, should you invest in art? That depends on your love for art, the strength and diversity of your existing portfolio, and your readiness to hold onto your artwork if necessary. If you tick all these boxes, the vibrant world of art investing may just be your next creative endeavor.
FAQs
Is fine art a good investment?
Fine art can indeed be a good investment, provided you’ve done your homework about the art market and know how to choose the right pieces. Like any investment, however, it carries a risk.
It’s important to remember that past performance doesn’t guarantee future returns. So, while you could potentially make a good profit, investing in fine art isn’t suitable for everyone.
2. How do I start investing in art?
If you’re ready to dip your toes into the art market, there are several ways to start. Online auctions and art fairs are a good way to explore and purchase artwork.
Alternatively, fractional art investing platforms like Masterworks or Public allow you to buy shares in art, which can be an affordable way to start. If digital art appeals to you, consider investing via NFT (Non-Fungible Token) platforms.
3. How much money do you need to invest in art?
The amount you need to start investing in art greatly depends on what you decide to buy. Famous artworks can require an investment in the millions of dollars. Fractional art investing, on the other hand, could start from as low as $1,000. NFTs and some original artworks from galleries and fairs can also be purchased for less than $1,000.
4. Is art investing profitable?
Yes, investing in art can be profitable. However, predicting which pieces and artists will be the most profitable is not always straightforward. Choosing the right pieces by the right artists could potentially reap substantial returns. Just remember, like any investment, there’s also a chance you might not see a return on your money.
Bottom Line
While the world of art investing certainly isn’t without its pitfalls, it holds a unique allure for those who are passionate about aesthetics and history. Yes, the financial risk is real, and the returns aren’t always assured.
But for those who are ready to tread thoughtfully and invest wisely, it offers a canvas of opportunities – an avenue where financial gain and personal pleasure can harmoniously coexist. So, if you’ve got a discerning eye for art and a well-reasoned approach to your investment, take a plunge into this captivating market.
The masterpiece you buy today could be your jackpot tomorrow! Remember though, as with any investment, never gamble more than you’re willing to lose. Art, after all, is for the heart as much as it is for the wallet.
