A few months ago, we hosted an event called The Art of Finance, an intersection between Art and finance. We believe that despite requiring patience, research, and a commitment to learning, investing in art can be a rewarding and enjoyable experience. However, the art market is dynamic and can be influenced by trends and changes in the global economy, so staying informed is crucial. In this article, we will explore how to invest in Art.
Clearing the misconception about investing in Art
Before we dive in, we want to clear the common misconception about investing in Art. Heading down to your local crafts store and buying a canvas, some paints, and an easel is one way to invest in art, but that isn’t the only way. While art owners can’t trade paintings or sculptures like a stock or bond, they can buy art, as it is an asset class itself. Investors typically describe assets like art as “alternative investments.” Other alternative investments include real estate and typically high-risk hedge funds, crowdfunding, cryptocurrencies, private equity, and venture capital.
Why invest in art?
The short answer is diversification. A well-rounded portfolio should encompass various asset classes, including stocks, bonds, and, yes, alternative investments like art. Diversification helps mitigate potential losses in one asset category, such as stocks, by capitalising on gains in others.
How do you invest in Art?
Art investors have a few ways to draw themselves into the market. They can buy artworks by relatively unknown or aspiring artists, classics by well-known, usually deceased legends, or works by artists somewhere in between the two.
The barriers to investing in unknown artworks are relatively low since it can be as simple as buying a friend’s piece or something you like at an art fair. In doing so, investors take on the risk of volatility; the price of the piece could rocket if its creator is discovered and critically lauded in the mainstream, or it could melt lower if the artist doesn’t become mainstream.
On the other hand, buying works by old masters or modern legends has historically been trickier, requiring investors to find their way into pretty exclusive auction houses and shell out big bucks to get in on the action. Those who do, however, typically see the value of their artworks rise over time.
The value of the top artworks rose by an average of 9% each year between 2000-2018, while the US stock market rose an average of 3%. The index tracking the value of the most important artists’ work is adjusted annually – as with a stock market index like the S&P 500 – with newly successful artists supplanting those falling from favour.
To grasp this better, the number of major art sales began falling months after the onset of the 2008 global financial crisis. Yet, art’s value didn’t fall as much as stocks’ during the downturn. Research by economists shows that the prices of high-end artworks don’t typically move in lockstep with the stock market, i.e. its correlation with markets is relatively low.
That may be because art isn’t subject to systemic risk, the notion that a market tends to behave as a single entity. When the economy’s healthy, art changes hands frequently, and there’s high liquidity. But while stock market investors often race to sell their assets when things head south, owners of expensive artworks, who tend to be pretty well off, usually don’t resort to desperately grasping for whatever they can get. Instead, they simply hang onto them until the market becomes more favourable for selling.
Things to look out for Before Buying Art
Here are four key things to think about before buying art:
- The historical importance of the artist
Assessing the historical importance of an artist is a fundamental aspect of art investment. To gauge an artist’s significance, consider if the artist is recognised and esteemed by major institutions and art scholars, as their approval can be a strong indicator of an artist’s lasting impact on the art world. Additionally, if the artist is deceased, the presence of an estate or trust to safeguard and promote their works’ best interests can significantly contribute to preserving and appreciating their Art’s value over time. Examining whether the artist was part of a broader art movement, like Impressionism, is also essential, as such movements often raised the profiles of many artists beyond just the most prominent figures. Lastly, the artist’s recognition and high ratings by import dealers and art critics can offer insight into their potential for robust resale value and enduring appeal in the art market. These considerations collectively help investors evaluate an artist’s historical significance and ability to withstand time, playing a pivotal role in making well-informed art investment decisions.
- Art first, artist second
As the saying goes, “a rose by any other name would smell as sweet.” A similar principle applies in the art world. Simply because a piece bears the signature of a renowned artist doesn’t automatically ensure its greatness. Take, for instance, the prolific Pablo Picasso; while his name carries considerable weight in the world of art, not all his creations are equally hailed. Many of his lesser-known works may not hold the same significance as his blockbuster pieces, explaining why some of his ceramics can be found at relatively affordable prices. In the world of art, as in nature, it is often the intrinsic qualities and uniqueness of a piece that truly define its worth rather than the fame of its creator.
- Access is Everything.
When delving into the art market, it’s essential to recognise that access can often be the true bargain. The question to consider is, do you have the kind of access that opens doors to networks of dealers who specialise in the specific art you’re passionate about? In this world, the significance of access can often surpass the importance of the initial price.
In fact, it might be worth paying a slightly higher price for a piece that grants you entry into exclusive networks and opportunities, both in terms of future acquisitions and sales. The art market isn’t always solely about immediate gains; it’s also about establishing valuable connections and positioning yourself strategically in the market.
- Don’t spread yourself too thin.
In art investment, it is important not to spread your resources too thin. This approach contradicts traditional investment advice, which often strongly emphasises diversification. However, when purchasing artworks outright (as opposed to acquiring shares in one), the prevailing belief is that most investors fare better by allocating their resources toward one or two high-value pieces rather than many affordable ones.
The rationale behind this strategy is rooted in the unique dynamics of the art world. It’s important to note that highly-rated and critically acclaimed artworks tend to come with heftier price tags. Consequently, investing in a more expensive piece is more likely to be regarded as historically significant, thus enhancing its potential for long-term appreciation in value.
Risks Involved in Buying Art
Counterfeits are a concern for many art investors. Naturally, a fake isn’t worth as much as an original, and its discovery as such can render an investment nearly worthless. As with all assets, investors are also subject to market fluctuations, affecting the value of their investments.
Some investors are negative about art altogether. One common opinion is that it’s more guesswork than thoughtful investing since tastes can change, and most pieces lack any inherent value beyond the aesthetic, unlike companies’ stocks, whose values are based on expected future profits.
Another concern art detractors highlight is that, while art is typically a good way to preserve the value of money, it’s not so good when it comes to getting that cash back out since major art sales are few and far between. And there’s no guarantee investors will find a bidder willing to pay the price they want.
Where can you buy Art?
Buying a work of art is a great option for investors with serious cash. Fancy a plate by Picasso? Buy for $5,000. An oil painting of his mistress? More like $155 million.
Buying and selling high-value art tends to be centred around a few big auction houses, which hold regular public events or organised private sales.
Once investors have their artwork, they can display it at home or store it for safekeeping. However, some savvy investors might loan their art to a gallery. Sure, they risk damage or theft, but having it on display is a constant reminder of the art’s value and might help it sell for a higher price in the future.
Buying shares of art
If the above seems a bit beyond your reach, don’t worry. Thanks to technological advancement, investors who don’t have millions to spare can invest in art, too.
Just as we have helped to democratise access to finance and portfolio-based investing, we have a product called Assetbase that provides a gateway for art enthusiasts and investors to partake in the art market in a more accessible manner. Assetbase offers the opportunity to buy art shares, effectively democratising the art investment landscape.
This means that instead of needing a substantial financial outlay to acquire a complete artwork, you can invest in fractions or shares of valuable artwork. This approach reduces the financial entry barrier and also allows you to build a diversified art portfolio without the constraints of buying entire pieces.
So, whether you’re a seasoned art connoisseur or a budding investor with a passion for the arts, Assetbase opens doors to the art market, making it more inclusive and within reach for a broader range of individuals. Join the Assetbase beta launch by creating an account here.