A guest post to help you decide if investing in art is something that could work for you.
Art Investment is No Passing Fad
To some of us, investing in art might feel more like rolling a dice than a solid investment. In the last couple of years, the fine art market has generated a noteworthy buzz around big auction sales such as the record-breaking 91.1-million-dollar sculpture by Jeff Koons at Christie’s – the most expensive work ever sold by a living artist. The sculpture, a large silver reflective rabbit, was purchased by gallerist Robert Mnuchin at Christie’s in 2019.
While the rabbit sale may have set a record, bids of several million are far from uncommon in the world of art. Sotheby’s Hong Kong sold a painting by the late Chinese-French painter Zao Wouji for 65.1 million dollars the same year. And in 2017, “Salvador Mundi” thought to be by Leonardo da Vinci was sold at Christie’s for 450 million dollars, making it the most expensive piece of fine art ever sold. It is those who have passed away who get even higher prices than their living contemporaries.
The worldwide art boom is by no means a passing craze. The 2020 annual report by UBS Global Art and Art Basel reported that global art sales surpassed 50.1 billion dollars that year despite the pandemic, down 22 per cent from 2019. The three major art hubs – the UK, the US, and Greater China – continued to account for the majority of the value.
Is Art Investing Right for You?
While numbers like these can make investing in art alluring, this alternative asset market can pose significant challenges. In this post, we’ll look at a variety of pros and cons to help you find out if art investing is the right approach for you.
If you are an art lover and are willing to take some risk, investing in art can be a great way to diversify your portfolio. By no means is investing in art and collecting art reserved for the well-heeled elite, since there are multiple ways you can get involved in the game. From investing in blue-chip originals to buying high-quality art reproductions, there is a wide range of options for you to explore. However, you should be aware of a vast array of challenges before you dive into the process of finding the best art to buy as an investment.
What You Need to Know Before Investing in Art
Just like stocks and bonds, the value of fine art can increase over longer periods. Once you decide to invest in a painting or a sculpture, you will buy it expecting that the demand for that piece will grow. If this happens to be the case and the value of the artwork increases, you would be able to sell it with a good turnover.
While this is simple logic, how then to find the best art to invest in? When looking at the big numbers of the art game, we often forget all those artists who are not as fortunate. The sales that make headlines like Koon’s sculpture are more like a paradox: While increasingly commonplace, at the same time, it is an art world anomaly. Sales like Koon’s are driven by a small group of collectors who are willing to pay these astronomical prices for fine art created by an even smaller group of artists. Most living artists, on the flip side, will never sell in the six- or seven-figure range.
What does this mean for the investor? You must be both very knowledgeable and lucky to pick an affordable piece of art by an artist whose career will be so successful that the value of their work will be skyrocketing. Returns like these are rare, yet they aren’t coincidental either. To successfully purchase art, due diligence will be necessary, which means extensive research, diligent planning, and a good understanding of the cultural and historical significance of the piece of art you are focusing on.
Just like any other market, the art market is subject to ups and downs. What is specific to the art market though is that every piece of fine art will have its individual value, making it impossible to determine a certain ‘true’ value. As central parameters to define the value of the piece, you need to consider the artist’s reputation alongside the overall condition of the economy.
Before you settle on an artwork, dedicate several months to the passive observation of valuation trends and auction news. To get a good sense of what pieces and artists are of high value, try to scoop up as much information by talking to art specialists and curators. You can further browse online auction houses and platforms like Artnet to do some more research about the type of art you are interested in. Once you feel attracted to an artist’s work, narrow down and get an understanding of the pricing.
To sum up, investing in art is hard work. To find a piece of art that generates significant returns, you must consider the overall influence of the artist and his artwork well beyond public recognition and media praise.
What Happens After You Have Bought a Piece of Art?
Once you have your precious artwork in possession, you will have to take good care of it. Protection and maintenance are central when it comes to preserving the net worth of your piece of art, which naturally is a form of tangible asset. There are generally two different kinds of maintenance: You can choose to buy a good-quality frame, display it in your home, and make sure to provide it with the right humidity conditions, an appropriate room temperature, and protect it from sunlight. Otherwise, you might decide to have it stored professionally for a fee, where it will be kept at optimal climate-controlled premises. Don’t forget about several further expenses, such as fees for authentication and appraisal, insurance, sales tax, and transportation costs.
Further Things to Consider before Investing in Art
From the beginning, you need to have a clear idea of how much you are willing to spend on artwork and further calculate expenses of maintenance, insurance, and storage. Be aware that risk tolerance will be necessary and only spend a sum of money that you could afford to part with in case the piece of art is not easy to sell or does not appreciate as expected. Yet you will have control over how much risk you are willing to take by choosing one of the following approaches to art investing:
- The riskiest, but possibly most rewarding option is to buy an original piece of a living artist at a gallery, an auction, or an art fair. Both extremes are possible: If you found an artwork that strongly appreciates over time and is worth much more than in the beginning, then congratulations! On the other side, the career of the chosen artist might not work out as you expected, and you could have a hard time selling the piece.
- If you have the right budget, you can decide to buy so-called “blue-chip art” – an original piece of an artist who has already proven to be popular and is widely recognized. The work of a blue-chip artist will have been solidified on the auction market over the course of decades. Examples of some of the most famous blue-chip artists are Gustav Klimt, Egon Schiele, Pablo Picasso, and Jackson Pollock. Naturally, the cost for this kind of art will be much higher, but there are hardly any risks since the artwork’s value will most likely remain constant and increase over time.
- If you don’t have the cash, buying reproductions of a piece of art can be a good alternative. Instead of buying the original, you will be purchasing a high-quality remake or print of the drawing or painting. Of course, a limited-edition reproduction will be much cheaper than the original but can still hold a good value. Thorough research will be necessary since prints usually do not appreciate as much as the original.
- In case you are looking for the safety of blue-chip art but at an affordable price, or you want to avoid the trouble and costs of maintaining an expensive picture, investing in an art fund is a great option. The set-up of these funds is comparable to other investment funds since it allows you to partially own ‘a piece’ of art: The fund is a structured investment vehicle that is open to third-party investors with the obvious goal of financial gain. Since the artwork is securitized, the market for ‘artwork shares’ is more liquid, meaning that it is much easier to buy and sell your shares of the piece of art than doing the same with you owning the artwork itself.
Is Art Investment the Right Approach for You?
As we have seen, many factors need to be considered when investing in art and it does not come without risks. Yet if you have a true passion for art and get something out of researching the art market investing in art can be very rewarding. If one of your hobbies is going to museums and galleries, or if you are looking to decorate your home with a new piece of art anyway, then turning this interest into an asset should come easy.
Before investing in art, you should already have an established portfolio of other investments and be aware of the risks that come with art investing. Don’t build your financial future around receiving possible profits and do not invest in art if you cannot afford to lose it. Nonetheless, art investments can be a great way of diversifying your assets, especially since the art market does not fluctuate in coherence with the stock market.
And finally, if you should opt for physically owning a piece of art, be prepared to hold on to it for a longer period and do not expect to liquidate your holdings too quickly. No matter how great the monetary value of your artwork is, as an illiquid asset, it will take much longer to sell compared to liquid assets such as saving accounts, stocks, and bonds.
