The best investors are those who have a genuine appreciation for art, but fine art investing is also a fantastic option if you're trying to balance risk and diversify your portfolio. These four methods will help you get going.
Art investing can be a wise decision if you're seeking ways to diversify your investment portfolio because you love art.
Blair Haden, registrar at Restoration Division, an art restoration company, stated that art is a great way to diversify and appreciate in value over time. "Fine art can be unaffected by a stock market crash and even increase in value.”
Although the art market has had highs and lows, one pricing index indicates that it regularly yields a 7.6% return for investors, outperforming the stock market in 2018. The current valuation of the art market is $64.1 billion, per a 2020 report published by Art Basel and UBS [1].
Furthermore, there are numerous methods to profit from this valuable asset. You can buy original art, put money into art funds, or even buy well-known paintings using brand-new platforms like Masterworks. Here are some things to consider if you're searching for an alternative to stocks and other conventional investment methods.
Why Do People Invest in Fine Art, and What Does It Mean?
Fine art is more than just paintings by well-known painters like Picasso or Van Gogh, despite what you might believe. Almost any creative work created primarily for artistic expression and enjoyment qualifies as fine art. Paintings and drawings are not the only categories that make up fine art.
Pure Strategy Inc.'s CEO and founder, Briana Brownell, makes investments in artwork such as paintings, sculptures, photographs, collectibles, and even clothing. The ability to live with that work of art in your home is, in her opinion, one of the most alluring aspects of art investing.
For a number of decades, investing in art has been common, particularly during uncertain economic times. Michael Wenner, vice president of marketing at Masterworks, for example, stated that during the coronavirus outbreak, investors sought out alternatives to the stock market. "People want to retain a part of their wealth in an asset-backed, slightly safer option," he stated.
The best investors are those who have a genuine appreciation for art, but it's also a smart option if you want to balance your risk and diversify your investment portfolio. Additionally, you should be in it for the long run—at least ten years—because the time horizon for profit is usually expressed in years or decades.
4 Ways to Invest in Art
While some investors view art only as a means of making investments, others have always loved the arts. While both sorts of investors aim to make money, some would rather view a sculpture than a stock certificate, according to Brownell. You have several choices when it comes to purchasing beautiful art.
1. Join Masterworks
A programme called Masterworks enables multiple investors to jointly own a single work of art. Due to the modest minimum buy-in, retail investors without millions to invest can now take advantage of this service.
Here’s how it works: After purchasing an artwork, Masterworks registers it with the Securities and Exchange Commission as a separate business and offers individual investors shares. Your whole investment portfolio will determine the minimum investment. A person starting with $1,000 would have a lower buy-in than someone with $1 million spread over multiple ventures.
Each investor halves the gain or loss when Masterworks sells the picture. Three to seven years is the time frame in which a profit is expected, with an appreciation goal of 10% to 25%.
According to Haden, one advantage of Masterworks is that it reduces the amount of labour required. "You can have greater confidence in their estimates and returns because they have art experts conducting the research behind what they offer."
Masterworks claims to concentrate on "blue-chip" art, or works created by the top 100 artists whose sales are consistent. Between 1995 and 2021, the annual appreciation rate of blue-chip art was 14.1%.
Wenner stated, "You would want to buy something that has a track record you can analyse if you were to research a stock or bond." We work with artists such as Picasso, Basquiat, and Monet because of this. You can develop a quantitative strategy by examining how well they have performed at auction over time.
However, one must also take the disadvantages into account. You have less control over the investment and only own a small portion of it. Sell your painting on the secondary market to generate income, or wait for Masterworks to sell the painting—a process that can take years. The fee structure will also reduce your profit margin, just like most investments do.
Storage, shipping, and insurance are covered by an annual 1.5% administration charge, and Masterworks will retain 20% of the proceeds from the sale of an artwork.
Three artworks that Masterworks has sold thus far have had net annualised gains of more than 30% each. This does not represent the entire performance and does not imply future outcomes. However, it demonstrates that despite the charge structure, investors might still receive favourable benefits.
2. Invest in an Art Fund
Masterworks and mutual funds are comparable in that each member of the group owns a portion of the artwork. There were almost 70 active art funds as of mid-2014.
When it comes to starting prices, mutual funds are typically more exclusive; the minimum buy-in might range from $2,500 to more than $1 million. Along with this, you will pay a management fee ranging from 1% to 3%, and the fund will retain a portion of the gains.
But compared to standard investing, art funds often provide more control and higher potential returns. Anthea, an art investment fund, had a 23.4% return from 2013 to 2014; their top investment generated a 404.3% return. According to the Fine Art Fund Group, it offered a 9% return before costs.
This approach has a significant drawback in addition to its large buy-in: you usually don't get to enjoy the art yourself. However, a solution has been developed by at least one private fund, the Artemundi Global Fund, which permits investors to alternately exhibit the artwork in their homes.
3. Flip Art
Similar to buying a house or a car, you can buy art with the intention of selling it for a profit as soon as possible—usually within five to ten years.
Flipping art may be very profitable. One striking example is the $350,000 price rise ($9 million) that a painting by Jean-Michel Basquiat realised after going up for auction three times between 2005 and 2012.
Even if many works of art resell for more money, you can't always make money. Many investors lose money on items that could be profitable. For instance, in 2013, paintings by Lucien Smith brought in about $390,000. However, in later years, the cost of his services decreased to between $5,000 and $20,000.
Art flipping is not a practice that is supported by the art community. Artificial price surges may arise from it, which would be particularly detrimental to emerging and young artists. In addition, the original artist typically receives no financial benefit from sales of their work when it reaches the secondary market.
4. Collect and Sell Art
When you purchase artwork, you have the option of keeping it for yourself or passing it on to your kids and other family members.
Your earnings may align with the average 7.6% return if you choose to sell. Fine art auction houses are excellent venues for sales. However, their usual cut of your sale price is between 5% and 25%.
There are steps you can take to make sure you're making a wise investment before you purchase an artwork, whether it's online, at an art show, or at a gallery. Researching the artist, the artwork, and the art dealer is advised by Haden. After acquiring the artwork, take good care of it to maintain its worth and think about getting it insured.
Additionally, a restoration may be necessary. According to Haden, a restoration "revitalises artwork, increases its longevity, stops degradation, and can increase the final sale price."
Haden suggests getting an evaluation, confirming the artist's signature, and looking up open auction sale prices while trying to sell the artwork. You can decide how best to sell the piece after you are aware of the artist's market worth and any associated sales fees.
How to Invest in Art with Caution
Check that you have made sufficient contributions to your retirement account and other investment accounts before making an investment in fine art. Since the art market may not yield sufficient profits to support a stable income, most people only allocate a small percentage of their investment portfolio to the art market.
Considerations for what kinds of art to buy and how much to pay up front should also be made.
"I started with choosing pieces that I really liked or that were important to me," Brownell said. She keeps track of the collection's value roughly every five years. "I own items that I purchased for less than $1,000. Since then, they have greatly increased. However, if you're cunning enough, you can enter for less money.
Here are some professional pointers for making money when investing in art:
- Make sure your portfolio is diversified. Make sure that your portfolio has a minimal amount of art. You should work with a financial advisor to create an investing plan.
- Be sensible. Investing in art isn't a quick way to become wealthy. It's a long-term investment instead.
- Conduct research. You should attempt to make unbiased judgements and keep a constant eye on artists, their works, and sales prices. For instance, Haden suggests seeing how last year's hottest artists are doing right now before purchasing any of their pieces.
- Buy directly from a working artist. Picasso and other great artists who have passed away have built reputations and prices to match. However, if you come into a piece by a budding artist with promise, Brownell notes that the price point of the piece may initially be cheaper and eventually rise.
- Donating items.Think about giving your artwork away. Donating items from your collection can qualify you for a tax deduction. "In that case, the investment is about being able to offset some of your tax burden," Brownwell remarked.
This information can help you make informed art purchases, particularly if you're not familiar with making this kind of financial commitment.
Is It Risky to Invest in Fine Art?
Art investing is like most investing; it involves some level of risk. Like stock and bond markets, the art market experiences cyclical contractions. Determining the actual worth of artwork can be challenging as well, as it is influenced by both the general state of the economy and the reputation of the artist.
Art is also non-liquid; therefore, it's not easy to turn your investment into cash right away. If you decide to sell it, you'll need to find an auction house that is willing to handle the transaction, get the artwork appraised, and hope that someone will purchase it.
According to Brownell, "you might find that a large portion of your funds are invested in assets that you find challenging to sell when the time comes."
Additionally, the risk of artwork being lost in an accident or losing value due to normal wear and tear exists just like it does for any tangible item.
For these reasons, before making an investment in this asset class, it's crucial to conduct due diligence, determine your investment capacity, and consult with a financial advisor. It could be a fantastic approach to experiencing your portfolio in a different light.
