How Investing in Art Can Be an Asset to Your Portfolio

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Contributor, Benzinga
November 9, 2022

Investors seek to diversify their funds across many assets to mitigate risk and capitalize on more opportunities. Most investors start with stocks, but some begin to explore alternative investments. Investing in art can protect you from market downturns and generate profits. 

How Does Investing in Art Work?

Investors buy and hold art, usually for a relatively long period of time. Some investors frame and hang investment artwork in their homes before selling so they can see the piece each day. While you can trade stocks in seconds, selling artwork after a purchase takes more time.

Is Art a Valuable Asset?

Art is a valuable asset that can become more valuable over time. It varies widely in price with investments of over $100 million to purchase artwork from famous artists. The limited nature of art and strong demand in the market helps artwork rise in value. Art valuations are often detached from macroeconomic trends, making them a great choice during market volatility.

Is Art an Alternative Investment?

Art is an alternative asset that offers portfolio diversification. Alternative assets are riskier than conventional assets but provide additional opportunities for investors. Art investors make money from capital gains but do not benefit from dividends while holding onto the artwork. Most alternative assets follow the same structure.

Is Investing in Art Better Than Stocks?

Investors earn various rates of returns from the stock market but based on historical trends, the market goes up by 8% to 10% per year on average. However, market downturns and bear markets mean that in any given period, the stock market might not return anything close to that rate and could also drop. For example, the S&P 500 plunged 37% in 2008 whereas the art market fell 4.5%. Stocks have produced higher returns during bullish markets, but art investments often generate higher returns during bearish markets.

9 Tips for Investing in Art

Investing in art can strengthen your portfolio. Before you buy artwork, keep these tips in mind.

Start Small

Investing in a new asset can be exciting, but you shouldn’t rush into it. Investing a small portion of your funds lets you dabble in art and learn from mistakes with less money on the line. You can find affordable artwork instead of looking for pieces from famous artists.

Do Your Research

Researching an investment reveals opportunities. You will get better at deciphering great assets from overpriced investments. Investors should research the market to see which artists and types of art show the most demand. Doing research in advance can also help you identify forgeries so that you don’t overpay. 

It Should Be a Small Part of Your Portfolio

Investors shouldn’t put all their eggs in one basket. Spreading your funds across art and other investments minimizes risk and exposes you to more upside. Making art a small part of your portfolio reduces your downside. Multi-asset hedge funds can be a great way to invest in are while still diversifying your portfolio.

Art is a Long-Term Investment

Art requires a long-term mentality. It’s not like stocks where you can quickly buy and sell because of technicals, market news and other factors. Art investing can take years to produce significant returns. It takes time for buyers to recognize an artist’s value and become more interested in a line of work.

Art is Non-Liquid

You have to find a buyer willing to buy your art at a desirable price. Investors may have to present their artwork in several marketplaces before someone buys it. Artwork is not as liquid as stocks. Finding someone willing to buy the artwork at your price can take months or years.

Ignore the Hype

Some art reaches astronomical values because of timing. Trendy artwork can entice investors, but this type of artwork is a higher risk. When the music stops, trendy pieces can significantly drop in value. Focus on buying quality art instead of searching for trends. The value grows over time while trendy pieces have a limited shelf life.

Be Firm and Negotiate

The seller may set an excessive price for their artwork, but you don't have to pay it. Staying firm and negotiating a better price will lower your cost basis or help you avoid a bad deal. You have limited funds that can go into a limited number of art pieces. Don’t be afraid to walk away from opportunities because the seller wants to overcharge.

Buy it Because You Love it

Not everyone rushes to sell their art. Some investors hang up art in their homes and like looking at it for years. Do research to find several art pieces and focus on designs that you love. Focusing on artwork you like will help you make educated investment decisions.

Establish Contacts

Art investors build vast networks to stay in the loop on opportunities. Building relationships with gallery owners, artists and critics will improve your education on art pieces. You’ll learn about new artwork and can get early insights about upcoming art.

Diversify Your Portfolio with Art

Investing in art adds an extra asset class to your portfolio. Art is less connected to macroeconomic events and can gain value in the long term. Art often lags the stock market during bull markets but offers a cushion during bear markets. You can start small with art investments to understand the industry and hold onto money for new opportunities.

Frequently Asked Questions

Q

Is it safe to invest in art?

A

Each piece of art has risks and potential rewards, just like any asset. Some art can produce meaningful long-term returns.

Q

Is art a high-risk investment?

A

Art is a risky asset since it’s illiquid and can take months or years to sell. Doing research can mitigate your risk and help you buy assets closer to fair value.

Q

How can a beginner invest in art?

A

A beginner can visit art galleries and build relationships with people who know the industry. You can also buy a fund or exchange-traded fund (ETF) that invests in artwork.