Diversifying your investments isn’t just about balancing your portfolio between stocks and bonds. Alternative assets, such as fine art, might also fit in. An art investment is the purchase of a piece of art with the expectation that its value will increase.
If you’re interested in art, you can diversify your assets and even find something nice to hang on the wall. At the very least, your investment will look a heck of a lot better than a stock certificate.
Image source: The Motley Fool.
Good investment?
Is art a good investment?
Despite the high costs often associated with investing in art, it could still deserve a spot in your portfolio. The art market is not highly correlated with the stock or bond markets, which is exactly what investors should consider when diversifying their assets.
Art can also be a good hedge against inflation. People with a lot of cash on hand often look to buy hard assets such as art or real estate to protect their wealth. Still, investors shouldn’t depend on the high theoretical returns of investing in fine art.
Those seeking long-term, reliable returns need to collect broadly and maintain a diversified portfolio. But for every painting that quickly increases tenfold in value, there will likely be many pieces that barely appreciate and a few that decline considerably. Diversified art investors with a sizable collection should expect returns more comparable to those of bonds, not the market-beating returns touted by the art indexes.
What to know
What to know before investing in art
When you invest in a piece of art, you’re buying it with the expectation that demand for that piece or similar pieces will increase faster than supply. If that happens, the value of the piece will increase, and you may be able to sell it for a profit.
Choosing an artist can be difficult
You’re unlikely to discover the next big artist before they’ve earned a reputation and started commanding high prices for their work. Sadly, works by living artists don’t fetch the same prices at auction as pieces by those who have passed away.
You also can’t just go down to your local antique store and find a real Monet, Modigliani, Matisse, or Munch on sale for a few bucks. Buying work by one of those artists at auction would cost millions.
You may have to hold your art for a while
Even when you manage to acquire a piece that increases in value, the art market is relatively illiquid. You’d typically have to wait to sell, and you’ll incur high fees to a broker or auction house if you want to cash in on your investment.
Art requires maintenance
Art is typically a hard asset. Unlike intangible assets, such as retirement accounts, art takes up physical space. Care and maintenance are required to ensure the art retains its value.
If you display the art in your home, you’ll need to be mindful of temperature, humidity, sunlight, and other factors that could degrade the work. You can opt to pay a storage company to keep the work in a climate-controlled environment.
Other costs to consider include sales tax, transportation expenses, authentication and appraisal fees, and insurance. You may also want to buy a nice frame or another type of display mechanism for your artwork.
How to invest
How to make your first investment in art
There are several ways to invest in art, each with varying degrees of risk and reward. You can easily find art to purchase at galleries and auction houses (both physical and online) or at local art fairs.
Online magazines and social media channels, such as Meta Platforms‘ (NASDAQ:META) Instagram, can help you discover artists you like, and you can buy works directly from artists’ websites.
Or you might dive into the world of non-fungible tokens (NFTs), which can represent ownership of digital art.
High risk and high price tag
Buying original works at auctions, galleries, and art fairs can come with the highest price tag and the highest amount of risk.
You can buy works by an up-and-coming artist, hoping you’ve found the next Banksy. A one-of-a-kind painting or sculpture could someday be worth much more than what you paid, or you might have trouble reselling it.
Low risk and low price tag
Instead of buying an original, you could opt for a print of an original painting or drawing. Many artists and galleries will sell limited-edition prints of some works at a set retail price on their website.
A high-quality, limited-edition print can be very valuable and costs a fraction of the price of the original. But since prints aren’t usually unique, they don’t increase in value as much as the originals.
Low risk and high price tag
You can buy pieces by blue chip artists, such as Andy Warhol, which generally hold their value better but offer less capital appreciation. Blue chip artists are those whose works have the most stable value and are not subject to fashions and speculation.
Many first-time investors can’t afford to buy a blue chip painting or sculpture. However, several funds enable investors to buy shares in a holding company that will buy a blue chip piece of art (more on that below).
Importantly, you should buy works that make you happy. If you invest $25,000 in a painting you think is ugly just because you expect its value to rise, you’re missing out on the fun part of investing in art versus other asset classes.
Other options
Other ways to invest in art
It’s still possible to invest in artwork without taking possession of the physical asset. Art funds, structured much like other investment funds, allow investors to partially own pieces of art.
MasterWorks, for example, is a fund manager that acquires blue chip art from auctions on behalf of its investors. It creates a holding company for each piece to acquire, store, promote, and resell it for profit. The firm registers the company with the Securities and Exchange Commission and issues shares to investors.
These funds make investing in art more accessible and the market for its shares more liquid. Investors can buy and sell shares more easily than they can buy and sell the actual pieces of artwork.
Firms conduct research to identify artworks with a good chance of appreciating in value, and they oversee the maintenance required to keep them in pristine condition. However, investors pay a fee for the service and don’t take physical possession of the art.
Unfortunately, there is no such thing as an art exchange-traded fund (ETF) or mutual fund. Focusing an ETF or mutual fund on art is impractical given the art market’s illiquidity.
Art’s singularity and inherent scarcity prevent fund managers from simply buying more Renoir or Basquiat paintings to satisfy increasing investor demand. Similarly, if many shareholders of an art fund 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 art ETFs or mutual funds?
Unfortunately, there is no such thing as an art exchange-traded fund (ETF) or mutual fund.
Art indexes
The art indexes
- Art 100 Index tracks sales of 100 artists across various regions, styles, and periods.
- Artprice 100 Index tracks blue chip artists.
- Art indexes are only as good as the data they track. If art isn’t selling, there’s no data to update. And art usually doesn’t sell for much less than it was bought for.
- The S&P 500 typically outperforms art indexes.
- Art indexes cannot account for the additional costs of owning and selling art, which are significantly higher than those of owning and selling stocks.
Where to find it
Where to find art to buy
You can find art for sale just about anywhere. Your local coffee shop probably has art for sale hanging on the walls.
Brick-and-mortar galleries
To make a profit, galleries charge a hefty markup that investors may view as wasted money. But galleries also provide services such as promoting artists and getting their works into museums.
A gallery’s investment in an artist indicates that the gallery views the work as a valuable contribution to the arts. So, the artwork is likely worth more than a painting on the wall at a coffee shop.
Online galleries and auction houses
You can buy art through an online gallery or auction house. The big names — Sotheby’s, Christie’s, and others — accept online bids. You can also find smaller, exclusive online galleries and auctions. Be sure to research the reputation of any online art dealer before you bid or buy.
Many artists also sell directly to customers through their own websites.
Benefits and risks
Potential benefits and risks of investing in art
The primary benefits:
- It’s a diversifying asset since returns are largely uncorrelated with those of stocks or bonds.
- It’s typically seen as a hedge against inflation, similar to other hard assets.
- You can support artists you like and fuel your personal passion for the arts.
- It’s pretty.
The potential risks:
- You might be unable to sell a piece when you want to, due to the market’s illiquidity.
- Valuing art is much more difficult due to the market’s illiquidity, which can lead to mispricing a piece.
- You may suffer a total loss if a piece is damaged and it’s not properly insured.
Who should buy
Who should (and shouldn’t) invest in fine art?
Investing in fine art may be right for you if:
- You have a passion and appreciation for art and are willing to do your research.
- You have an established portfolio of other investments and want to diversify your assets.
- You have a high risk tolerance.
- You’re willing to own a piece of art indefinitely.
- You can afford the maintenance and insurance for the pieces you acquire.
Avoid art as an investment if:
- You want returns that outpace the stock market.
- You have no interest in displaying the works you buy.
- You value liquidity in your holdings.
Investing in art 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 you can proudly display. If any of your artwork substantially increases in value, you can sell those pieces for a handsome profit.
Latest trends
Latest art investment trends
There’s been a growing trend in recent years for collectors and galleries to focus on emerging artists rather than established ones. Emerging artists offer higher risk and higher rewards for investors, as their pieces generally cost less but could become extremely valuable if the artist’s popularity increases.
More art auctions and galleries are moving to online listings. While that produces some information challenges for investors, it also opens up more opportunities to buy a new piece.
For small investors, fractional ownership through companies like Masterworks allows them to gain exposure to the asset class without having to tackle issues like storage and maintenance.
Related investing topics
FAQ
Investing in art FAQ
Is art a good investment?
Fine art can be a good investment for those looking to diversify their assets since art prices are typically uncorrelated with the returns of stocks or bonds.
However, investors shouldn’t expect to beat the long-term returns of stocks with an art investment. Additionally, art is an illiquid asset. It takes time and money to sell a piece.
Is there an ETF for art?
There are no ETFs for art. The fundamental scarcity of unique artworks and their illiquidity make it impossible to create a publicly traded fund that can effectively put investor capital into fine art.
What type of art is the best investment?
The most stable values in art come from blue chip artists. While they won’t produce huge returns on your investment, they should provide returns that outpace inflation over the long run.
However, buying something you like is a more important consideration for most people. If you buy an ugly painting just because you think its price will go up, you’ll be deeply disappointed if it doesn’t appreciate. But art you personally love will always have high intrinsic value for you and your family.
Why do millionaires invest in art?
Art can serve as a diversifying asset to a more traditional portfolio, with returns that are mostly uncorrelated with the returns of stocks or bonds. It can help protect wealth against inflation pressure as well. Millionaires may also like the prestige of displaying valuable artwork in their homes.
How do art investments work?
Investing in art requires a medium- to long-term holding period, as an investment typically comes with some high up-front costs, including fees paid to galleries or auction houses and sales tax. Art investments also need to be maintained to avoid damage. An appraiser may help determine the best time to sell a piece to meet your investment goals.
Is art a tax write-off?
Generally speaking, art isn’t a tax write-off. Some businesses may be able to claim that a piece of art displayed in their office or building is decor, including its cost as a business expense. For most people, however, art doesn’t have any special tax advantages.
Is art a better investment than gold?
Both art and gold are seen as hedges against inflation. Both have their advantages, though gold is a much simpler investment, as it’s very easy to buy and sell and doesn’t cost very much to own. That can make it a more appropriate diversifying asset for many investors. Art investments can yield better returns, but they require a lot of capital and the ability to identify good opportunities.
