Brushstrokes of Wealth: Exploring Art as an Investment Avenue

The underwhelming performance of conventional asset classes in recent times has prompted investors to seek out alternative avenues for potentially higher returns. As a consequence, there has been a significant growth in alternative investments such as real estate, commodity futures, private equity and hedge fund investments. However, art is also increasingly emerging as an enticing alternative investment option for investors. 

Andy Warhol's dollar sign being hung up. Photo Courtesy: CNN Business 

Opportunities 

Whilst art is not the first thing we think about when we consider investing in something, it is worth examining its potential. 

Firstly, art investment provides a hedge against market volatility. Unlike traditional assets, the value of art is not directly tied to broader economic trends or market fluctuations. Rather than being dependent on market trends and fluctuations, it is valued by factors such as scarcity, provenance, and aesthetic appeal, reducing the risk of an asset crashing due to market downturns. 

Secondly, art investment offers the potential for attractive returns over the long term. Data has shown that the value of an artwork grows steadily. Artworks by renowned artists have consistently appreciated in value over time, showing that art can, in fact, bring a high return on investment. However, essential to mention here is that not only do masterpieces and well-known artists such as Picasso or Warhol increase in price, but also prints and editions which go for significantly less money.

Here, a similar rule applies to a traditional investment:  Greater investments usually lead to larger returns on investments but also to higher losses in case the investment does not go as planned.  

Lastly, one should stress that art as an investment differentiates itself from other investments due to its tangibility and its consequent active engagement and personal involvement. Unlike traditional investment assets such as stocks and ETFs, art ownership encourages investors to actively participate in the art market through auction house visits, exhibitions and art fairs, fostering a deeper appreciation for one’s investment as well as relationships and conversation topics. Art transcends mere investment when acquired; it embodies a profound appreciation and love for the artwork being procured. 

Illustration by David Foldvari. Photo Courtesy: Nuvo Magazine 

 Challenges and Risks

Every investment comes with its risk, and when it comes to art, the risk differentiates themselves a lot from conventional investments, making it harder to invest for someone not knowing the market.  

One of the main issues prevailing in the art market is its opacity. Whilst the art market is becoming more and more transparent due to the development of technology, still a lot of information is not publicly available making it hard to investigate a potential return on investment. Whilst auction prices are available and there are databases such as Arttactic or Artprice, putting those together, a significant share of the market, which comes from private dealers, is not publicly available, leaving a considerable gap that should be considered when conducting market research for a potential investment. 

Another challenge that needs to be considered by new investors is that owning an artwork comes with significant maintenance fees, especially if the artwork is of considerable value. Whilst market downturns often do not affect the value of an artwork, its condition and provenance definitely do. One has to pay for the handling of the artwork, the insurance, as well as the storage, if special storage is needed to not damage the artwork. One needs to consider if potentially loaning it to a museum could increase its investment due to the change in provenance or if the cost of loaning it to a museum and searching for a museum is higher than just storing it at home. One must remember that art is a long-term investment and that this comes with certain duties if one wants to gain a return on investment.  

Furthermore, the art world carries the risk of encountering counterfeit or forged artworks, casting uncertainty on investment decisions. Other investments, such as stocks or real estate, do not have this kind of risk. Thus, investing in art poses a risk of not getting anything back if the artwork bought turns out to be a forgery.  

Despite the above-named opportunities in art investment, one should also consider the possible risks when doing so. With limited publicly available information on the market, with specific fees accompanying such an investment, and with significantly higher risks of counterfeit or forged artworks, one really needs to know how to navigate these risks to make an informed decision.  

A bidder holds up his paddle at Sotheby's in New York City. Photo Courtesy: Stephen Chernin/Getty Images 

Tips and Tricks when investing in Art

When considering art investment, thorough research is paramount. While all investments carry risk, the unique nature of the art market requires investors to delve deeply into understanding its intricacies. Unlike traditional investment opportunities, navigating the art market demands a nuanced understanding and careful consideration of various factors. Therefore, conducting comprehensive research beforehand is essential to make informed investment decisions in the world of art.  

This can happen through thorough provenance research, excluding the artwork has been stolen or looted or is perhaps a forgery. It can be through including professionals who know the art market and can give you expert advice on how it would be wise to invest. But it can also be through following the trends and the news and realizing what might or might not be the next hit seller. In any case, before investing in an artwork, it is advisable to do one's research to limit the risks and liabilities.  

Another essential thing to remember when investing in art is ignoring the hype. One should buy art based on research and the quality of the art rather than on the trend currently prevailing. Buying art based on trends usually leads to a loss of investment or only a short-term investment. 

Finally, it is recommended to purchase artwork that resonates personally. Investing in art offers more than just financial rewards; it provides aesthetic and cultural enrichment. Art bought for investment purposes often finds a place on one's wall, providing enjoyment before potentially yielding a positive return on investment when sold. 

Bibliography

[1] Moskowitz, Dan. ‘The Risks of Investing in Art and Collectibles’, accessed 15.02.2024. https://www.investopedia.com/articles/personal-finance/061815/risks-investing-art-and-collectibles.asp#:~:text=Common%20risks%20include%20the%20high,of%20destruction%20of%20the%20assets.  

[2] RBC. ‘Is artwork a wise investment?’, accessed 15.02.2024. https://www.rbcwealthmanagement.com/en-us/insights/is-artwork-a-wise-investment  

[3] Mei, Jianping, and Michael Moses. "Art as an investment and the underperformance of masterpieces." American Economic Review 92, no. 5 (2002): 1656-1668. 

[4] Campbell, Rachel J. "Art as a financial investment." In Collectible investments for the high net worth investor, pp. 119-150. Academic Press, 2009. 

Sandra Nikusev

Art Markets Co-Editor, MADE IN BED