Art is a form of expression. It communicates the emotions of the one who created it. But for some people who buy a piece of art, the primary consideration is oftentimes investment value and returns. Art has become an asset class that not only gives enjoyment but also provides a chance for the owner to reap some capital gains.
Current circumstances surrounding the global economy – primarily the influx of cash that has resulted from quantitative easing in the US and Europe, as well as the rise of the wealthy class in China and in certain Middle Eastern countries – have resulted in a significant increase in art sales over the past three years.
Market uncertainties in the western economies have also pushed fund managers to look to the art world as a way for them to diversify their portfolios. Art now serves as a hedge against certain black swan events and possible declines in currencies, equities or fixed instruments.
With the possibility of a bubble in the art market, investors now have an opportunity to ride with the trend of rising art prices.
Here are some pointers on how to go about investing in art:
- Determine how much you are willing to invest. Just the same way you would treat an investment in fixed income or in equities, you have to decide on how much of your portfolio will be allocated to art. Art is highly illiquid so once you sink your funds into it there’s no turning back. At least not for a long time. Some funds allocate five to twenty percent of their portfolio in art.
- Get help from a reputable advisor. You can go to established museums and galleries that can refer you to art consultants. A well-connected advisor can give you sound advice about trends and pricing. An art advisor has inside information about what sells, whether a piece of art is undervalued or overpriced, or which is more likely to hold its value over time. Since works of art are luxury items, the prices can at times merely reflect the buyers’ whims. And, because there are just a few sellers or buyers in the art market, prices can also be subject to wild swings.
- Find out which artist’s period has the best prospects for value appreciation. In the past few years, post-World War II artists have attracted a significant amount of buyer interest. The money that is currently flowing into the art market comes from the new rich and they are attracted to the relatively new works of art that were created only within the past seventy years.
- Get to know the artist’s life and accomplishments. When was he born? When did he die? Who trained him? Who else did he work with? Who are his contemporaries? Where did he study? Which museums or galleries hold his works? What awards or honors has he received? Who are the other collectors who own his works? What is his life story? All these considerations affect the value of an art work.
An art investor also needs to be aware of certain characteristics of the art market before he decides to invest.
- Art is illiquid and to be considered as a long-term investment. For this reason, you should also buy something you would be happy to live with and see hanging on your wall for a long time. It would be nice if you have an emotional connection with the art you buy.
- Art is a luxury item. As such, it can be affected by people’s subjectivity.
- Art is cyclical. It moves in the same way fashion trends do. Art trends come and go and then resurface again. If you are a value investor, you might consider buying something that was once in the spotlight but has gone out of favor for a while. That way, you have a bigger upside in terms of your investment’s growth potential.
- Art can be used as a store of value or a hedge against financial market declines. The average prices of art works were plotted against the S&P and they seem to follow the same trend. However, during times when the stock market plummets, art values have remained relatively intact. Of course, this goes hand in hand with art’s other characteristic of illiquidity. Together with antiques and jewelry, the price of certain works art would go up even more when the market for financial instruments sees a decline in value.