As an investor, you may look for ways to diversify your portfolio. Considering hard assets can seem like a good idea, especially if there’s uncertainty in the stock market. Investing in fine art, however, is quite different than your typical portfolio allocation. Find out how what types of fine art you can invest in, where to make a purchase, and what to expect for both advantages and disadvantages.
Investment Grade Art
There are several different types of fine art that are considered investment grade. One of the most important components of identifying an investment-grade piece is validating its authenticity. It typically must bear an official document by a reputable expert. Other required documentation to confirm are the provenance and a clear title. The more background on the ownership history of the piece, the more valuable it may be.
While less objective, marketability also plays a role in determining whether or not a piece of art is of investment grade. To help improve the chance of liquidity when you want to sell, you want to find a piece of art from an artist who is internationally recognized. This broadens the appeal so you can ideally sell more quickly and at a profit when you’re ready.
Investment-grade art typically falls into one of four categories:
- Masterpieces: Artwork created by the Old Masters, such as da Vinci, Rembrandt, and Caravaggio.
- Blue-Chip Art: Pieces from deceased artists whose work sells consistently at auctions, placing a premium on the potential for a return.
- Established Living Artists: Current artists who have exhibited their work in prominent galleries and museums.
- Emerging Artists: Artists who are just starting to receive critical recognition and currently sell their art at a lower price point.
Where to Buy Fine Art
For higher investment-grade art, you’ll likely need to go to an established auction house to bid on a piece. Do some research in advance on what similar pieces have sold for; additionally, the auction house may offer an estimate of what they expect the piece to sell for. The seller may also require a reserve, meaning the piece won’t sell unless bids reach a certain threshold.
You can also buy through an art dealer, who can help identify pieces that match your taste, budget, and any other parameters you have. This can be a good option if you’re new to the art world and want to learn more about what makes a good investment. As with any business relationship, iron out the details of deliverables and fees before getting started.
If you plan to buy pieces from an emerging artist, the most cost-effective way is to purchase directly from the artist. This saves you in gallery fees and may even set you up for special events of discounts from the artist in the future.
Art Index Funds
Instead of buying a physical piece of art, another option is to invest in an art index fund as part of your overall portfolio. Like any type of fund, art index funds leverage a large group of buyers to purchase a range of portfolio pieces. As an investor, you own a share of the collection that’s part of the fund.
Before picking an art index fund, it’s important to perform your due diligence on the firm. Not only should you review their performance record, but you should also research their practices for storing and insuring all of the pieces within the fund. As an alternative investment, an art index fund probably shouldn’t be a leading component of your overall portfolio, but many investors do use it as a way to diversify outside of the stock market.
Pros and Cons of Fine Art Investing
All investments come with pros and cons, but it’s quite different when you’re dealing with physical investments like fine art. Here’s what to consider so you can make a wise decision both today and years down the line.
For investors who like to stay in control, art offers the chance to keep the asset in your own physical possession. All of the care and maintenance is up to you, so there’s less risk of someone else inserting themselves or taking advantage of you in some way. Once the piece is purchased, there’s no investment firm middle-man to contend with. Investing in art holds a similar allure as those who invest in gold bullion and can be used to diversify intangible assets that likely dominate your portfolio.
Potential for less volatility
Some experts say that investing in art can be less volatile than equities and can help balance your portfolio. As people cash out of the stock market, they may have more cash to invest in tangible assets like art. Others might also find it to be more of an attractive place to put money if the market is experiencing a lot of turbulence. Plus, when you invest in the art hanging on your walls, you’re not tracking daily values or worried about nuances and fluctuations like you would be with traditional investments. They’re simply not measured on the same scale.
Buying art is by no means a short-term investment. It’s really designed for those who are willing to wait a minimum of 10 years before expecting any kind of increase in value. Additionally, as the value of your art collection grows, you can potentially collateralize it for a loan if you need financing further down the line. Even if you can’t or don’t want to sell it, you can potentially take advantage of the appreciation in another way.
Of course, buying art can bring personal joy, from getting to see and enjoy your investment everyday to becoming a social insider in the fine arts world. For many, becoming a patron of living artists also brings a sense of fulfillment. It’s also a useful estate planning tool that you can enjoy for a period of time, then potentially pass onto your family or donate to a charity later in life.
No true basis for value
One of the downsides to investing in art is that valuation can be difficult (and subjective). While market fluctuation is by no means as volatile as the stock market, there may be periods where the entire fine arts market is down.
And at any given time, the value of your art can wane given the current demand for the artist, as well as market data from auction houses. Other third-party market research may impact the value of your collection. Finally, it’s important to note that an appraisal performed for insurance purposes is typically higher than one done for a potential sale.
No ongoing returns
Unlike investing in stocks or real estate, fine art does not offer any returns. If you’re a dealer or have a close relationship with one, you could potentially charge people to view your collection. Otherwise, you won’t realize any potential gains until you actually make the sale. Even then, there’s no guarantee that you’ll profit on your investment. It simply depends on the market at the time.
Expensive costs involved
On top of not earning returns on your art, you’ll also incur costs both at the time of purchase and throughout your ownership. When you first purchase a piece, you’ll likely have to pay transaction costs. These include things like the seller’s commission, auction house fees, and shipping and insurance fees.
Once in your care, art maintenance costs include annual insurance premiums, plus the proper cleaning and storing methods. If you ever move, packing fine art can come with additional expenses and insurance when you hire professional movers.
As with any physical asset, there’s no guarantee there’s a market to sell to in the event you need liquid funds from your collection. Unlike stocks, you can’t make an automatic trade whenever you need some cash. Selling art takes time, whether you choose to sell through an auction house, through consignment, or search for an individual buyer. It can also be expensive to sell through a third party, so be sure to understand the seller’s commissions upfront and ensure you’re happy with the price after those are accounted for.
The Bottom Line
Purchasing art as an investment isn’t a conventional process. From researching the type of artists to buy to contending with the ongoing care and insurance of your collection, there’s a lot involved compared to regular investments like stocks and bonds. There’s also a much different timeframe, and while day to day volatility is low, fine art may not always appreciate as you expect it to.
On the other hand, investing in art can not only bring joy but could potentially diversify your portfolio and become an integral part of your estate planning, whether through generational wealth transfer or your future philanthropic efforts.