Artwork is a good way to diversify your portfolio. Artwork can have both an aesthetic value as well as potential financial returns. Artwork can be a less volatile investment than traditional investments like stocks, bonds and savings accounts. It will also appreciate in value if it is properly maintained. Art investing involves researching an artist’s previous sales prices and reputation as well as considering how to maintain artwork over time.
- Written By: Ryan Scribner
- Edited by: Jeff Rose, CFP (r)
- February 16, 2023 Update:
- 6 Minute Read
- This page contains 2 Citated Research Articles
- Advertising Disclosure
Diversification is not usually on the minds of investors when the stock market is consistently rising. This is because for a period of time, you are benefiting from inadequate diversification.
When the stock prices start to move in the opposite direction, problems begin. When crypto, stocks or real estate start to decline, the lack of diversification is evident.
The majority of people have a portfolio that includes stocks, bonds, and perhaps real estate. There are other asset classes to consider.
Alternative Assets refers to non-traditional investment such as farmland, artwork and precious metals. These investments, once considered “boring”, are gaining in popularity now as people look to diversify their portfolios beyond stocks. According to the Chartered Alternative Investment Analyst Association art as an investment is a $1.7 billion asset class.
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This article will look at how to diversify your portfolio by investing in art.
Artwork Investing 101
Before we talk about adding artwork to your portfolio, let’s first understand the basics of how art investing works. This is a very different investment from stocks and bonds.
You must understand that art is subjective. It is based largely on opinion. It is difficult to determine the value of an artwork. For a stock you can simply use revenue, profit and growth to determine the fair market value.
Investing in art is important
While you own the artwork, it does not generate any revenue or profit.
Selling artwork for more than you paid is the only way to earn money. The asset is not yield-bearing, which means it won’t pay dividends or rent while you keep it. The art market is slow to grow or appreciate.
Prepare yourself for a five to twenty-year investment.
Investing in Art: What Types are Available?
Art can be of many types, including:
|Type of Art||Description||Pros||You can also find out more about Cons|
|Paintings||Paint can be used to create original or limited edition paintings.||Value appreciation potential||It can be costly to purchase and maintain|
|Sculptures||Created using different materials such as wood, metal, stone or clay||Displayed indoors or out||Handling and maintenance often requires special expertise|
|Photographs||Limited edition or original photographic prints||Paintings and sculptures can be cheaper than other types of art.||Artwork with limited value appreciation potential compared to other types of art|
|Prints||Limited editions of reproductions of original art.||Original artworks are more affordable||Original artworks have a higher value than reproductions.|
|Mixed Media||Artworks made using a variety of materials and techniques||Can be visually stunning and unique||The variety of materials can make it difficult to value.|
|Digital Art||Digital art is a new way to create artworks.||It is easy to reproduce and share||It is still a developing market with uncertain value appreciation potential|
|Street Art||Artwork created in public places, often using unconventional material like stencils or spray paint||It can be both visually stunning and culturally significant||It can be difficult to legally acquire or own.|
|Ceramics||Clay artworks fired in a kiln||Both decorative and functional||Artwork with limited value appreciation potential compared to other types of art|
Art can be purchased through many different channels including galleries, art shows, online marketplaces and direct from the artist. Art is valued by many factors, including the reputation of the artist, the rarity of the work, and demand for it.
How much should you invest in art?
Let’s talk about adding art to your portfolio now that you understand artwork investment as a whole.
Alternative investments should be a part of your portfolio. Artwork could be included in that allocation as an alternative investment. The majority of experts recommend investing 15% to 30% in alternative investments. Some experts suggest investing as little as 2%. The ideal mix probably lies somewhere in the middle.
For example, if you had a $100,000 net wealth, and decided to invest 15% in alternatives. This would amount to $15,000. You shouldn’t invest all your money in artwork. Diversifying your alternative investments is also a good idea. This could be $5,000 in artwork, $5,000 in farmland or $5,000 in cryptocurrencies.
Remember that art should be a part of your alternative investments. Your alternative allocations then make up a portion of your overall investment portfolio. Never “go all in” with any asset class or investment.
Where to Invest in Artwork
In the past, there were few options to invest in art. In many cases, you would have to buy the entire painting by yourself. You can also purchase art through art galleries.
Here is a list that will make it easier for you to invest in art.
- Sotheby’s is an international auction house that has locations around the globe.
- Christie’s — Another large auction house, which sells anything from ancient masterpieces to contemporary works of art.
- Paddle8 — An online marketplace that sells museum-quality works of art by contemporary artists and top designers.
- Artsy – A website that offers works by thousands and established artists from around the globe, organized by experts into collections.
- 21c Museum Hotels A series of boutiques hotels featuring cutting-edge artwork from the 21st century, rotating exhibits, and tours around their collections.
Fin-tech, or “financial tech”, has changed the game. There are now a number of cutting-edge platforms that allow investors to invest in artworks through individual shares and funds. You can own a share of a painting with other investors instead of purchasing the entire piece.
The most popular ways to invest in art today are:
1. Masterworks – The first platform to make buying artwork shares possible. Start with just $500 to buy fine art shares in increments of $18-$25.
2. Yaeldstreet While you cannot buy individual artworks here, there are investment funds with exposure to art. Prism Fund is the most popular, as it invests in art and other asset classes. The investment minimum is $2,000.
3. Public – Public, the online brokerage platform, recently acquired Otis, an alternative investment platform . You can now access these investments through Public. You can now buy shares in artwork, sneakers and NFTs.
4. Auction house – If you want to purchase a painting in its entirety, you can also look for an auction house. Sotheby’s is the most famous, followed by Christie’s and Phillips.
Pros and cons of investing in art
The benefits of investing in artwork
- Art can appreciate over time. This is especially true if an artist becomes well-known, or if a piece becomes rarer.
- Diversification: Art can help diversify your portfolio, and reduce the risk of investing in traditional investments or stocks.
- Art for personal enjoyment: Many people collect and own art as a way to enjoy themselves. This can be an exciting aspect of investing.
- Tax benefits: Investing in art may offer some tax benefits. For example, you can defer capital gains taxes through a 1031 swap or take a charitable deduction.
Cons of investing art:
- Lack of liquidity: Art can be hard for you to sell quickly and its value can be hard to estimate. It can be difficult to get your money when you need it due to a lack of liquidity.
- Art market risk: The price of artwork can fluctuate as a result of changes in the art markets or the reputation of the artist.
- You may need to pay storage costs and insurance to protect the investment.
- Costs of art transactions: The cost of buying and selling artwork can be high, including commission fees charged by galleries or auctioneers.
- Expertise is required: To invest in art, you need to have a certain amount of knowledge and experience. Before making any investment decision, it can be beneficial to consult a financial expert or an art expert.
Before making an investment decision, it’s crucial to weigh the pros and cons and understand the risks and limitations.
Bottom line – Investing In Artwork
Since centuries, art has been reserved only for the wealthiest members of society. Thanks to the massive advances in financial technology, this is no longer true.
It’s important that you understand how artwork is invested and the returns generated.
You can learn all about art investing by visiting my blog The Artwork Investor.
Investors may want to diversify their portfolio sooner than later, as inflation is expected to persist in the months to come. Artwork is one way to build a portfolio that will last.