Art represents different things to different people. To some, it is "an adventure of the mind."1 To others, it’s "a signature of civilization"2 or "a lie that makes us realize the truth."3 And still to others it is "an instrument of moral propaganda."4 Art may be any of these, but when you consider it a bit more pragmatically, it is also a potentially profitable investment opportunity.
In fact, research shows that long-term investments in fine art — as represented in this report by the paintings sold by the top auction houses in New York and London — produced returns that are, on average, roughly comparable to investments in broad portfolios of U.S. equities. What’s more, price appreciation for fine art has tended to have a different rhythm than price appreciation for stocks, so values for each asset class have tended to appreciate most strongly at different times. That suggests portfolios that combine average-performing stocks with average-performing fine art could be less volatile than portfolios of either asset alone.
Another aspect of the financial performance of fine art is that values tend to hold up well during periods of economic difficulty. For example, consider the price performance of fine art during the 27 recessions recorded between 1875 and 2000. During those downturns, the average fine art price decline observed at auction was just 0.7%, according to Jianping Mei and Michael Moses of New York University’s Stern School of Business. Their index is constructed from auction house records and takes account of all auction sales of paintings that have come to market more than once at major auction houses between 1875 and the present.
During periods of world turmoil and recovery, fine art prices tend to be relatively durable. For example, World War I depressed stock prices in New York and London. By 1920, stock prices in both cities recovered to 94% of their prewar levels. In contrast, fine art in 1920 was selling on average for 125% of its prewar value, according to the Mei/Moses index. There were similar patterns during World War II and its aftermath and the Korean War and its aftermath. During the Vietnam War (1966 to 1975), the S&P 500 declined 27%. The categories of art that were indexed by Mei and Moses, however, climbed 256%.
A How-to Primer
While any investment requires homework, investors in fine art are presented with some unique challenges. High on your list of considerations should be your decorative and aesthetic tastes. You are likely to be looking at your investment relatively frequently in the course of time, so you’ll want to feel comfortable that your holdings fit well with the home or office environment in which they will be displayed. Also, you may want to develop specialized expertise in one particular type of fine art in order to help select and evaluate potential investment opportunities. If you do specialize, you’ll not only want to focus on items you like and know about, but those that are priced within the range of your investment allocation.
One of the primary areas for novice investors is currently active artists. Prices may be relatively low and the field of selection may be broad. What might you look for to decide whether an artist is a potential investment opportunity? You can determine whether the artist is represented by an agent, which would suggest that his or her work might receive more exposure and higher-level sales. You should also look at the record of places in which the artist’s work was — or is — appearing. A record of increasing prestige in the past can be a solid signal of future growth as well. Other potentially strong signals are a pattern of favorable reviews in reputable publications and frequent exhibitions in major galleries. Many investors track these indications by attending shows as often as possible.
Consider the Risks
Art works may require special handling and maintenance, as well as relatively tight control over the temperature, humidity, and ambient light levels in their exhibition spaces. You may also be required to make special provisions for insurance and physical security for your holdings.
On a financial level, prices for individual works may be unpredictable, which could make it as easy to lose as to profit. Investment horizons typically run for years or even decades, and it is not uncommon for holdings to become part of one’s financial estate. And the market generally is illiquid, which significantly limits an investor’s ability to convert a holding into cash if necessary.
When it does come time to sell a holding, keep in mind that galleries may offer limited exposure, and major auctions are relatively infrequent. As with real estate, it may take a considerable period of time to identify a buyer and negotiate the terms of the sale. Except for major auctions, pricing can be opaque, which means that it may be difficult to determine what comparable items might be selling for at any given time. Additionally, transaction costs may be high — sales commissions, appraisal fees, and storage and shipping costs all tend to be greater for fine art than for other asset classes.
When evaluating individual purchases, there are many things to watch out for that may not arise in the course of investing in financial securities. For example, there is no official registration office or certification authority that can authenticate the ownership of individual works of art. Reputable sellers will offer a document called a provenance that is intended to provide verifiable proof of ownership, but paintings may sometimes be offered without clear title. Other transaction risks include forgery, mislabeling, and auction fraud.
Ultimately, all of these risks have been shown to be manageable. Successful investors have been surmounting them for decades, if not centuries, taking not only economic reward but a deep sense of enjoyment and satisfaction from their investment in fine art.
1Eugene Ionesco, French playwright.
2Beverly Sills, American singer.
3Pablo Picasso, Spanish painter and sculptor.
4George Bernard Shaw, Anglo-Irish playwright.
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