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For centuries, investing in art has been an activity reserved for the wealthiest cohorts of society, meaning that retail investors had little to no chance to diversify their portfolios by incorporating valuable artwork.
In recent years, financial innovation and the adoption of digital solutions have led to the creation of vehicles whose purpose is to democratize access to the fine arts as an investment opportunity.
In this article, we will explain how to invest in art for those who are new to this trend. This includes detailed insights about how the fine arts market works, which vehicles are used to invest in these pieces, and some recommendations for beginners before they make their first purchase.
What Is Art Investing?
Investing in art involves browsing, selecting, and purchasing a masterpiece created by an artist. Art can be anything, but most often, it is a painting, a sculpture, or a JPEG file. In some cases, a replica could also be considered an investment.
The process of investing in art involves researching an artist, understanding their artwork, and valuing what is in front of the eye to determine if the investment could be worthwhile.
Since the value of a piece of art is highly subjective, investing in art can be challenging, which is why it is most often done by a trained eye or with the assistance of a professional. This helps people avoid buying worthless pieces that may end up producing capital losses.
According to Statista the global art market was valued at $65.1 billion U.S. dollars in 2021, recovering from the sharp drop reported in 2020 due to the coronavirus (COVID-19) pandemic. In contrast, while the volume of global art sales also increased significantly in 2021, it remained below pre-pandemic levels. Meanwhile, online sales of the art and antiques market worldwide accounted for approximately a fifth of the total art market value.
How Do Art Investments Work?
The process of investing in art starts by browsing the market to identify potential opportunities that capture the eye either due to their potential to appreciate in value in the future or because they appear to be temporarily undervalued.
Once an investor has identified an opportunity, the artwork can be purchased either directly from the artist or through an intermediary such as a dealer, an auction house, or a gallery — among other alternatives.
Investors can opt to buy originals, limited replicas, high-quality prints, or reproductions. The best alternative for a particular investor depends on his/her budget, risk tolerance, and other similar factors.
Then, the investor must store the artwork safely or flip it by selling it to someone else at a higher price.
Even though this process seems simple at first glance, the complexity of this market should not be underestimated as many variables play a role in shaping the valuation of masterpieces and even replicas.
Investors can opt to incorporate artwork into a portfolio to increase diversification. Art is considered an alternative asset from the perspective of portfolio construction. A thoroughly conceived strategy could yield positive results in the long term with estimates from a specialized unit from Citigroup pointing to a 7.5% annual return produced by art investing.
There are multiple factors to consider when investing in art. Here’s a summary of some of them:
- Liquidity: Art can be relatively illiquid compared to other asset classes and that increases the odds of wider bid/ask spreads and, hence, the possibility of not finding suitable buyers if the investment has to be sold in a rush.
- Storage: Storing artwork can be costly and those costs could weigh on the return produced by the investment in the long term.
- Investment horizon: If the investor opts to adopt a buy-and-hold approach when investing in art, chances are that five years or more could pass before the asset appreciates in value significantly to justify selling it. Therefore, art investing might not be suitable for people with a limited investment horizon or whose financial goal is to produce a steady stream of income.
- Regulatory matters: The laws that regulate art dealing and connected activities are not as strict as those that regulate the stock or bond market. Therefore, investors are more exposed to potential losses resulting from fraudulent schemes.
When it comes to maintaining the integrity of a piece of art, here are some of the most important costs to consider.
|Appraisal costs are something that must be considered by an investor prior to committing to buying a piece of art.
|Insurance is a cost that should be considered to keep your art collection protected against theft, fire, flood, mold, etc.
|Investors can work directly with private conservation centers to keep the art collection in good shape. Conservation centers can maintain and repair the art work, if necessary.
|If you’re planning on having your art work displayed, consider the costs of installation. You will have to hire an expert to properly handle and install art pieces.
|Storage for art work is something that must be considered in order to keep the objects secured and in a proper temperature controlled environment.
|Crating & Shipping
|Transporting art from place to place requires proper crating, shipping and insurance.
How to Invest in Art
Now that we have touched ground on how to invest in art, the following is a thorough step-by-step guide to help you make your first operation in this interesting market.
Step 1: Do Your Research Before Investing in Art
With this in mind, investors who are not experts in this field should invest some time in understanding the variables that influence the valuation of art pieces including the most basic: the artist, the artwork, and the dealer.
The artist is the mastermind behind the creation. His/her track record, background, expertise, and other similar factors will weigh on the valuation of the pieces produced. Therefore, researching the artist is the first step when trying to determine the fair value of a piece of art.
On the other hand, the artwork is the second most important factor to research. In this particular aspect, investors should focus on the techniques used to create the masterpiece (for originals), the relative scarcity of the issue (copies), and the historical relevance of the piece — among many, many other variables.
There are essentially four types of artwork:
- Originals (only one in existence)
- Prints (high-quality replicas/limited supply)
- Gicleés (museum-quality prints/limited supply)
- Reproductions (lower quality prints/produced en-masse)
The intermediary or dealer is also an important puzzle piece in the process of investing in art. Investors should make sure that they are dealing with a reputed institution or vendor with no prior records of fraudulent operations or any other similar misconduct. Additionally, the fees charged for helping both parties in settling the transaction should also be compared to the industry’s average.
Finally, the overall state of the art market is another factor to research as investors should determine in which stage of the cycle the market is in. Investing during the late stage of a bull market could lead to severe short-term losses. Meanwhile, investing in the late stage of a bear market could produce sizable gains and reduce the required holding period.
Companies like Art Market Research produce indexes that track the evolution of this market by compiling the results of auctions from 130 different salerooms across the world. This index allows investors to keep track of how the market as a whole is performing and could help them in identifying the stage at which the art market is.
Step 2: Determine Your Investment Strategy
When investing in art, different strategies can be followed to generate capital gains or even some income out of this activity.
The first approach is the good old buy-and-hold strategy, which consists of buying a piece of art whose potential to appreciate in value over time is elevated. This is mostly the case for art produced by up-and-coming artists or relatively scarce masterpieces that are constantly on demand. As time passes, the value of these pieces should appreciate and deliver nice gains to the holder.
The second approach is art flipping. Same as with real estate, this strategy involves buying a potentially undervalued piece of art to then sell it at a profit to somebody else. It could also involve restoring or refreshing the artwork in case it had been damaged by the passage of time or the elements.
The third approach involves investing in vehicles that provide diversified exposure to the art market. Companies such as Masterworks have perfected this method as they allow investors to buy shares in a particular piece of art instead of buying the whole thing. This allows investors to own a fraction of multiple art pieces and reduces the risk that a single underperforming investment may drag the entire portfolio down the drain.
Finally, investors can buy a piece of art to lease it to third parties such as museums and galleries to be displayed. This generates a steady stream of income although there are safety issues that must be considered if this is the approach that the investor opts to go with.
|How It Works
|Collect & Sell
|Art work is purchased with the intention of holding it for a period of time and the selling it for a profit.
|Art work is purchased with the intention of reselling it in a short period of time for a profit.
|Investors would own a piece of art collectively and would also share the profit upon sell.
|Typically privately offered and dedicated to the generation of returns through the acquisition and disposition of art.
Step 3: Determine Where to Buy Artwork
Now that you have established an investment strategy that will allow you to get started in artwork investing, you now have to decide where to buy your artwork investment. The good thing is that you have plenty of options these days.
This is the most common way to invest in art and involves buying and holding a certain piece for some time or flipping it by selling it at a profit in a relatively short period. Physical art could be bought at different places including auction houses, art fairs, galleries, or directly from a third party.
For original artwork, the investor should secure a certificate of authenticity from an expert to validate that the piece is what it claims to be. There are also storage matters that must be satisfied to prevent the piece from deteriorating over time.
Companies like Masterworks and Otis allow investors to buy a fraction of a piece of art instead of the whole thing to build diversified portfolios. This can be done online and these companies take off the heavy burden of authenticating and validating the state of the artwork — among other things.
These can take the form of a picture, gaming equipment, or a piece of code. Anything in the digital world can be owned now and ownership is established by minting the artwork on a decentralized distributed ledger for others to verify.
Platforms like OpenSea, SuperRare, Foundation, Nifty Gateway, and Rarible have created marketplaces on which people can buy and sell NFTs easily. Here are the top NFT marketplaces and how they compare.
|Auction, fixed price and best offer
|Largest inventory of NFTs
|Auction and fixed price
|Community invite and upvote
|Auction and fixed price
|High royalties for artists
|Auction and fixed price
|Exclusive artists on the platform
|Auction and fixed price
|No gas fees
|Auction and fixed price
|No service fees
Step 4: Buy Your Art Investment
Investing in art is not cheap unless the investor adopts a strategy that consists of buying copies with the potential of appreciating in value over a long period or flipping them.
Depending on which approach the investors pick, the entry budget could range from tens of thousands of dollars to millions.
Investors should also consider storing costs as part of their investment budget if they go for physical art and adopt a buy-and-hold approach. Other costs include authentication, transaction, and auction fees.
Overall, investing in art is a long game as it typically takes several years for a piece of art from an up-and-coming artist to increase its market value.
Step 5: Sell Your Artwork When the Time Is Right
Most investors have an exit strategy for art as they prefer to take advantage of top-cycle prices to dispose of their holdings instead of waiting for another cycle to take place as the required holding period could extend significantly.
With this in mind, investors must identify the right time to buy based on the market’s condition and the compounded annual return of their investment. As a rule of thumb, art is considered a risky asset class — possibly riskier than equities and real estate.
In turn, the annual return, after fees, of most investments should exceed the 7% to 10% threshold to be considered positive considering the risk assumed.
Benefits of Investing in Art
- It adds an extra layer of diversification to a traditional portfolio.
- It can generate above-market returns.
- Risk can be managed by properly selecting the best and most liquid artwork.
- There are multiple vehicles available through which investors can build diversified art portfolios.
Downsides of Investing in Art
- The minimum investment required can be high.
- The risk of fraud is elevated unless the investor takes appropriate measures to reduce it.
- Investing in physical art without professional expertise or advice can lead to severe losses.
- Art investing is not liquid.
FAQ on How to Invest in Art
The following are answers to the most frequently asked questions we get on the topic of how to invest in art.
Is Art a Good Investment?
In the past 15 years, the All Art Index from Art Market Research has delivered compounded annual gains of more than 10%. These returns are particularly attractive for a diversified portfolio and resemble those of the S&P 500 equity index.
Art seems to be a great addition to any portfolio with diversifying returns and risks in mind. That said, investors should limit the percentage of the portfolio that they devote to this asset class to make sure that their returns are not overly dependent on how the art market behaves.
Is Art Investing a Liquid Investment?
In most cases, no. Investing in physical art is perhaps the most illiquid approach of all as selling a piece at the right price could take time if the market is on a downturn or the artist has a small fan base.
However, companies like Masterworks have created a scheme that allows sellers to find suitable buyers faster for their fractional shares. Meanwhile, digital art such as NFTs can be rapidly sold online through marketplaces like OpenSea. In summary, the liquidity of the investment will largely depend on finding buyers for whatever the investor owns. In some cases, it can be easy. In some others, it could be extremely hard.
Should I Invest in Art as a Beginner?
Investing in art if you know little about this space can be challenging unless you do it through a company like Otis or Masterworks as there are multiple aspects of this activity that require a professional appraisal.
Therefore, investors should stick to these vehicles instead of going on a limb to gamble money on whatever investment seems attractive to their untrained eye.
Is It Risky to Invest in Fine Art?
Yes. Investing in art is risky and possibly riskier than other asset classes such as fixed-income securities and equities. First, liquidity is relatively lower. Second, the value of any piece of art is highly subjective and certain factors could weigh on its valuation, including the artist’s reputation and dominant trends. Moreover, physical damage is another important risk along with theft.
The returns of art investing are attractive but they don’t come without risks and investors should understand what those risks are before stepping into this activity.
How Much of My Portfolio Should Be Allocated to Art?
As a rule of thumb, no more than 5% of an investment portfolio should be devoted to this asset class considering that this is a sub-segment of the alternative investments portion of a portfolio.
This would limit the drawdown caused by poor investments but would also add gains to it in case the investor picks his/her cards right.
Is Art Investing Profitable?
Yes. In the long-term, the All Art Index shows that art has appreciated at an attractive compounded annual rate of more than 10%. This does not necessarily mean that all pieces of art have appreciated in value in the same way during that period but it does point to the fact that the market as a whole has evolved positively for many years.
How Much Money Do I Need to Start Investing in Art?
Depending on what the investor plans to buy (original or copies) the initial budget could start at thousands of dollars or it can go up to millions if the plan is to buy blue-chip original pieces.
Vehicles such as Masterworks and Otis have dramatically reduced this entry barrier by allowing investors to open an account with as little as $1,000.
Investing in art can be tricky but it can also be quite rewarding if the investor chooses the right approach. Financial innovation and technology have revolutionized how investors can get exposure to this asset class and this has made art investing more appealing to beginners.
That said, art investing remains a risky activity and investors should proceed with caution and make sure that they understand the ups and downs of this endeavor so they maintain realistic expectations while limiting their losses. Overall, art investing is a long game that requires patience, a trained eye in some cases, and a decent understanding of how these new investment vehicles function to make the most out of them.
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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.