Art As An Alternative Investment: A Guide To Buying Smart

Art has become an increasingly popular investment choice in recent years, with the global art market reaching sales of over $67 billion in 2022. Art can be a good investment choice as it can diversify your portfolio, with its value not being affected by the stock market. However, it is important to remember that art is a long-term investment, and there are various factors to consider before investing. Firstly, you should decide on a budget and be prepared to spend an amount you can afford to lose. You should also research the art world, visit galleries, and decide on a category or style of art that interests you. When buying art, it is advisable to seek professional help and verify the origin and authenticity of the artwork. It is also important to remember that art is a non-liquid asset, and selling it can be challenging and costly. Therefore, it is crucial to be patient and not expect quick profits.

Art investment is a long-term strategy

Art investment is not a get-rich-quick scheme. It is a long-term strategy that requires patience and a long-term holding pattern. Experts recommend art investment for patient investors with a time window of ten years or more, so it is important to think long-term. Art investors often include paintings in their estate planning as assets to pass on to their descendants.

Art is a unique asset class that is not correlated with the stock or bond markets. Its value does not rise or decline with the stock market, and it can be a good hedge against inflation. This makes it an attractive option for investors looking to diversify their portfolios and minimise risk.

However, investing in art comes with its own set of challenges. The art market has its own rules and is hard to predict. The value of artwork depends on various factors, such as the artist's reputation and the economy as a whole. It is also difficult to determine the true value of an artwork, and there are various costs associated with buying, maintaining, and selling art, including storage, maintenance, insurance, and authentication costs.

Additionally, the art market is relatively illiquid, meaning it can take time to sell artwork, and there may be high fees involved. As such, art investors should be comfortable assuming some risk and should only invest what they can afford to lose.

When investing in art, it is important to do your research and seek professional help. Consider the artist's reputation, the category and style of the artwork, and the latest trends in the art world. It is also crucial to verify the origin and authenticity of the artwork and to negotiate a fair price.

Remember that investing in art is a long-term strategy, and it may take time to see returns on your investment.

Diversify your portfolio

Diversifying your portfolio by investing in art can be a great way to balance your assets, especially if you have a passion for art and are willing to do your research. However, it's important to remember that art investments are typically long-term commitments and should only make up a small part of your portfolio. Here are some tips to help you diversify your portfolio through art investments:

• Start with a small portion of your portfolio: Art investments are often illiquid and hard to convert into cash quickly. Therefore, it's wise to start by allocating a small portion of your portfolio to art, which you can gradually increase over time as you gain more knowledge and experience in the art market.
• Research and educate yourself: Before investing in art, take the time to learn about the art world, including different artistic styles, periods, and markets. Visit local galleries, attend auctions, and talk to curators and art advisors to gain a deeper understanding of the field.
• Consider investing in emerging artists: Investing in emerging or young artists can be risky, but it may also yield higher returns if the artist gains recognition. However, it's important to diversify your investments and not put all your funds into emerging artists.
• Focus on a specific category: Instead of randomly picking pieces that appeal to you, focus your attention on studying one category of art or style of painting that interests you the most. This focused approach will improve your chances of making more informed investment decisions.
• Stay updated with the latest trends: Keep yourself informed about international art trends by regularly checking online sources and staying connected with gallery owners and artists. This will help you anticipate demand for specific genres and make timely investment decisions.
• Be patient and firm: Investing in art often requires patience as profits may take time to materialise. Be prepared to hold onto your art investments for the long term and be firm with your pricing expectations when buying or selling.
• Seek professional help: Consider seeking advice from art advisors or investment companies specialising in art. They can provide valuable insights and help you navigate the complex world of art investing.
• Verify the origin and authenticity: When investing in art, it's crucial to verify the origin and authenticity of the artwork. Connect with the artist directly if possible and ask the dealer or auction house as many questions as needed to address any doubts or concerns.
• Consider the costs and maintenance: Investing in art involves various costs, such as storage, maintenance, insurance, and authentication fees. Factor these expenses into your investment plan to ensure you can adequately care for and protect your art assets.

Research the artist

Researching the artist is a crucial step when buying art as an investment. Here are some detailed tips to help you with this process:

• Read about the artist and their work: Familiarise yourself with the artist's biography, including their education, career path, exhibitions, awards and recognition. Understand their artistic style, influences and the themes they explore.
• Visit museums, galleries and art fairs: By visiting museums and galleries, you can view the artist's work in person and develop a deeper appreciation for their style and technique. Art fairs are also excellent opportunities to discover emerging artists and speak directly with them about their work.
• Establish relationships: Build connections with gallery owners, art critics, artists and other collectors. These individuals can provide valuable insights and help you stay informed about the art world. Consider joining a museum collector's club or seeking advice from professionals, such as art advisors or dealers, who are members of reputable organisations like the Association of Professional Art Advisors or the Art Dealers Association of America.
• Research prices and sales history: Utilise auction houses, online databases such as ArtNet, and art advisors to research the prices of the artist's previous work. Understanding the sales history and market demand for their pieces will help you make informed decisions.
• Check for authenticity and provenance: When considering a specific artwork, examine the certificate of authenticity and research the edition number. Work with reputable sources, such as auction houses or appraisers, to minimise the risk of counterfeits.
• Look beyond trends: Avoid making investment decisions based solely on trends. Instead, focus on the quality and uniqueness of the artwork. Assess whether the artist has a distinct style or voice that sets them apart.
• Consider the artist's reputation and recognition: Evaluate the artist's reputation and recognition within the art world. Are they established, mid-career or emerging? Established and mid-career artists may be less risky investments, while emerging artists offer the potential for higher returns but with greater uncertainty.
• Explore the secondary market: The secondary market involves purchasing art that has been previously sold. This option can provide more predictable investments as the sales history of the artwork is known, making it easier to assess its trajectory.
• Seek expert advice: Consult art professionals, such as art dealers, gallery owners or private collectors, who have expertise in the specific type of artwork you are considering. Their knowledge and experience can help guide your investment choices.

Consider the costs of buying and selling

Art can be an expensive investment, with various costs to consider when buying and selling. It is important to be aware of these costs, as they can impact the overall value and potential returns on your investment.

Firstly, when buying art, it is worth noting that galleries typically take a substantial cut of around 50% on each sale. While you may be tempted to bypass the gallery and buy directly from the artist, it is important to remember that galleries often have close relationships with their artists. Artists may be committed to their gallery and not open to selling behind the dealer's back. Additionally, if the gallery has an established reputation and a proven record of reselling artwork, you may have a better chance of reselling your piece through them in the future.

Another cost to consider is the labour that goes into creating the artwork. Artists, especially those who are well-known or in high demand, factor their cost of living and materials into the price of their artwork. This is why even paintings displayed in coffee shops can sometimes have surprisingly high price tags. One way to potentially save on costs is to buy artwork that has been previously owned, as this can eliminate some of the markup from the original sale.

When purchasing art, you may also need to consider additional costs such as sales tax, transportation expenses, authentication and appraisal fees, insurance, and display or framing costs. These extra costs can add up quickly, so it is important to factor them into your budget when investing in art.

Selling art also comes with its own set of costs. Auction houses, your best bet for selling, often charge hefty fees. Broker or auction house fees can be quite high, and you may also need to pay a seller's commission, insurance fee, photo fee, and shipping and handling costs. These fees can eat into any potential profits you may make from selling your artwork.

It is also worth noting that art is considered a collectible by the IRS, so you will need to pay taxes on any gains made from selling your artwork. Additionally, art is a non-liquid or illiquid asset, meaning it can be difficult and time-consuming to convert it into cash. This is something to keep in mind if you are considering investing in art as an alternative to more liquid assets like stocks or bonds.

In summary, when investing in art, it is crucial to consider the various costs associated with buying and selling. These costs can impact the overall value of your investment and your potential returns. By being aware of these costs and doing your research, you can make more informed decisions about investing in artwork.

Art funds and fractional investing

Fractional art investing is a way to invest in high-value artworks without having to purchase the entire piece. This model has gained popularity in recent years as it opens up the art market to smaller investors who were previously priced out. Fractional ownership allows investors to buy a portion of a high-value artwork, providing access to the art market without requiring a large investment. This makes it possible for individuals to invest in high-value artworks, an asset class that was previously unaffordable.

The process typically involves a platform acquiring an artwork and dividing its ownership into shares, which are then sold to investors. These shares can be bought for anything from a few hundred to a few thousand dollars, and investors receive their returns when the work is sold for a profit. Fractional ownership also allows for diversification in an art investment portfolio, as investors can spread their risk across multiple artworks.

Art funds, such as MasterWorks, are structured similarly to other investment funds and allow investors to partially own pieces of art. MasterWorks, for example, acquires blue-chip art at auctions on behalf of its investors, creating a holding company for each piece, storing it, promoting it, and eventually reselling it for profit. It then issues shares to people who want to invest in a specific piece of art. This securitization of artwork makes investing in art more accessible and the market for the artworks' shares more liquid.

There are several other platforms that offer fractional art investing, including Artemundi and Splint Invest, which target European investors and offer investments starting at 50 EUR, and Rubey, which focuses on strengthening the art collections of museums by loaning the artworks it acquires to museums.

While fractional art investing has made it possible for a wider range of investors to access the art market, it does come with some limitations and risks. Investors may have limited control over the artwork, as decisions about its display, loaning, or selling are usually managed by the platform, and management fees can be high. The secondary market for shares is also still relatively immature, meaning that investors may need to hold their shares for several years until the painting is sold. Additionally, the unique nature of each artwork might mean that fractional shares won't appreciate as much as full ownership would.

Frequently asked questions