Investing in Art
Investing in art is an artform unto itself... and it can be mighty lucrative — if you do it right.
We've seen the price of art reach new heights recently, with the sale of Edvard Munch's The Scream setting an auction record of $120 million.
Over the past decade, the Mei Moses All Art index — which tracks the historical performance of art as an investment — has beaten the S&P 500 six out of the last 10 years and average annual return of almost 8%. Not too shabby.
And despite popular notions, you don't have to buy a turtleneck and grow a pencil mustache to become an art investor.
So where does the novice start?
Do you scout out art shows, looking for the next Van Gogh?
Do you buy a tried-and-true artist with a record of success?
It's really a matter of choice...
Let's start by making three distinctions: art collector, art investor, and art speculator.
Collectors place the value on what they like and what they want adorning their walls at home. Like fine wine, stamps, used books, or any other collectible, many collectors treat their art collection as a labor of love first and foremost.
As a collector, the best way to get started is to check out your local museums. Try to find pieces that excite you as a consumer of art and educate yourself from there.
The upside to collecting is that it is truly an enjoyable way to spend your money. Because unlike stocks or commodities, you can actually gain a lifetime of enjoyment from your investment — and then (hopefully) turn a profit when you are finished with it.
After making the rounds through the galleries, if you find that you aren't passionate about anything in particular, then investing in art is probably not for you.
Investors typically diversify their collections based on value, like Old Master paintings that will appreciate over time. Investing this way is typically reserved for the very wealthy who can buy and hold expensive pieces for many years.
You'll need around $10,000 to start an investment collection, according to some experts...
“You can start applying some investment logic and investment rationale, in investment-grade work, at around the 10,000 Australian dollar ($10,900) mark,” Alistair Bailey of Australian investment firm Art Equity told MarketWatch. “It becomes highly speculative below that, at sub-A$10,000.”
If you're ready to spend that kind of money, an auction house or an art dealer may be the best place to start. As always, do your own due diligence and make sure the dealer is a member of a legitimate association.
Speculators try to invest in under-the-radar artists they may "discover" — and hope to bank much larger gains than the collector or the investor. Speculators spend time haunting art shows and keeping their ear to the ground, looking for the next Picasso.
As with stock speculators, this is certainly the high-risk, high-reward approach.
Volatility is well-known in the art world — especially with modern art, where trends can change faster than you can say 'Salvador Dali.'
A few things to keep in mind...
- Tax Issues
The 1995 tax act allows art owners to donate their piece to a charity of their choice at the fair market value, which oftentimes is greater than the price paid.
The only catch is you must hold onto the piece for one year prior to donating it, and the deductions are capped at $20,000 a year.
- The Warhol Effect
One simple way of taking the market's temperature is to evaluate Andy Warhol's work.
“The traditional barometer of market confidence has been Warhol. When Warhol is traveling well, the market confidence is generally up,” Art Equity’s Bailey notes.
- Due Diligence
Since there is no true regulating body for the art world — like the stock trading world has the SEC — it can be rife with misrepresentation.
That said, it pays to check out any large purchases with a licensed dealer or appraiser. And just like stocks, if it sounds too good to be true, than it probably is. Watch out for forgeries and stolen goods.
"The best advice I can give the first-time investor in art is to think of it like buying a home," Peter Miller of the Japan-based Kamakura Print Collection told BankRate.
"You have to live with it. If you enjoy living with it, then the inevitable swings of the market won't affect your enjoyment. If the only reason you bought it is to sell it to someone else at a higher price, you're likely to be disappointed on both counts. So look closely, sort out what you really like from what the broker or dealer says you have to like, and choose accordingly."
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