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The art industry is opaque and full of asymmetrical information. Art gallery merchants have far more knowledge and expertise about the pieces they’re selling than the buyers. So how does an everyday investor avoid getting ripped off when buying fine art? By doing research, of course!
Why Invest in Art?
At a 2017 auction, the painting “Salvador Mundi” by famous artist and inventor Leonardo da Vinci sold for an astonishing $450 million. But in 1958, “Salvador Mundi” only garnered $60 at auction under suspicion that the work was just a copy. Going from $60 to $450 million in a span of 60 years? Even Microsoft and Apple are jealous of that type of valuation increase.
Finding assets not connected to public markets involves some tradeoffs. The practice of buying art is simple but selling art can be far more complicated. Art isn’t like a stock or mutual fund that you can ignore for 20 years and reap huge profits.
Buying art isn’t just a financial decision, it’s an emotional one, too. Not only does a piece of art need intrinsic value, but it also must appeal to the individual buyer. After all, no one buys an ugly painting just because they think it’ll sell for a profit someday. Here are some things to think about if you want to learn how to start investing in art.
Artwork can by and large offer some different benefits than traditional assets, particularly when you consider diversification, aesthetic appeal and lack of depreciation.
Diversification Away from Market Risk
When dealing with financial markets, risk is always on the table. Market risk is the systemic risk inherent to the stock market that can’t be diversified away. No matter how many cheap index funds you buy, you’re still going to lose money during a downturn.
But pieces of art aren’t correlated to any stock index or market. By buying art, you create a store of value completely separate from stock and bond market assets.
Aesthetically Appealing Assets
Does looking at the shares in your brokerage account excite you? Probably not, because a stock share is really just a boring legal document. On the other hand, art is an asset you can hang on your wall and enjoy while it appreciates.
Neil Young once said “Rust never sleeps,” and that’s especially true with hard assets. Houses deteriorate, cars break down and even people slow with age. Art doesn’t depreciate, though. A 500-year old painting is more valuable today compared to when it was commissioned by the European king who first wanted it.
As you might imagine, there are also a few drawbacks to investing in artwork over your garden-variety mutual funds.
One-sided Information Channels
Unless you’re an artist, critic or gallery owner, you probably won’t be able to judge a piece of art’s authenticity just by looking at it. Art transactions often have one party with a litany of inside info (the seller) and one who must take their word for it (the buyer). Artwork doesn’t have an income statement or P/E ratio.
Like investing in real estate, art investments are highly illiquid assets and selling for quick cash is exceedingly difficult. A painting can’t be quickly sold for profit without taking it through the proper channels. If you need cash in a hurry, an art collection probably won’t do you any favors.
High Commissions from Art Dealers
Like all opaque industries, the art world has its gatekeepers. These include gallery owners and dealers who will happily help you sell your art collection — for a substantial fee. Many gallery owners charge a commission up to 50% on each piece sold, so if you want to sell, be prepared for some sticker shock.
Types of Art You Can Invest In
If you’ve weighed the benefits and considerations and want to start investing in art, you’ll need to know what to buy. Thankfully, art can be broken down into different classes just like stocks on the broader market. Some pieces of art will be safe with practically guaranteed returns, others will be far more speculative. Here’s how to break it down.
Works of Old Masters
Pieces from the world’s most renowned artists always carry prestige, notoriety, and of course, big price tags. The “Old Masters” are artists from 18th century Europe, especially during the Renaissance period.
Leonardo da Vinci is the classic example of an old master, but works from these artists can be up to 500 years old. Pieces from the old masters are both the rarest and most valuable in the industry. Think of them as the Amazons and Googles of the art world.
Blue Chip Pieces
Blue chips are companies with solid track records of sustainability and profitability. In the art world, blue chips share a similar definition. While not on par with the old masters’ works, blue-chip art comes from well-known artists with a lasting cultural appeal, like Andy Warhol and Pablo Picasso. Blue chip artwork usually sells for more than $10,000 per piece.
The art world isn’t without its speculators and that’s why many investors seek out lesser-known artists, hoping to cash in on the next Salvador Dali or Ai Weiwei. Up-and-coming artists often produce high-quality work at a fraction of the price of blue chippers since they have yet to receive recognition for their art.
This is where a bit of expertise comes in handy. Speculating on art can be a profitable endeavor if you can spot something other experts have missed.
Don’t have a clue when it comes to valuing a painting or sculpture? Nervous about eager gallery owners who might be too eager to unload slow-moving pieces onto unsuspecting buyers with deep pockets?
Stock investors who don’t know which shares to buy can simply buy the whole market by owning an index. Art investors can do the same through privately-managed art funds.
What to Look for in a Piece of Art
Investing in art isn’t just a hop, skip and a jump to an Amazon-like site, and as you know, research can be tricky. Here’s what to look for.
- Originality: Make sure every piece of art you buy matches the artist’s original style. If something seems out of place or the work isn’t similar to other pieces by the same artist, it’s a red flag.
- Artist background: It isn’t just the artwork you need to research, but the artists, too. Before buying a piece, find out the artist’s history, who he or she trained under, what styles he or she prefers and where his or her art has been shown in the past. The more detail you can find about a particular artist, the more valuable the work tends to be.
- Outside opinions: The art world is no place for false bravado. If you don’t know what you’re doing, sellers may milk you for every possible dollar. Instead, find some trustworthy outside opinions about every piece of art you’re considering.
- Fits in your collection: Look for works that won’t clash with your current collection. Remember, you can both appreciate the aesthetics of your art collection and hope its value triples over time.
How to Invest in Art Works
Now that we’ve got the basics down, let’s go over a step-by-step plan to buying your first work of art. Keep the benefits and considerations listed above in mind when you go art shopping and only buy a piece because you like it, not because a gallery owner says its a lock to double in price in one year.
What You’ll Need Before You Start
Before buying any art, you’ll need a place to display it (or at least store it). Art doesn’t depreciate, but it can become damaged if handled improperly. If you have an extra room in your house away from direct sunlight and extreme temperatures, consider using that location as an art display. Also, set a budget for your first art purchase and commit to it.
Find a Platform That Works For You
Auction houses: Sotheby’s and Christie’s are the two most popular auction houses for artwork.
Art galleries: Cities like New York are full of art galleries with works available for purchase. Take your time and shop around at a few different ones.
Individual sellers: Finding art from an individual seller can be profitable, especially if the art has been mispriced. Additionally, individual sellers usually don’t have the expertise of a gallery owner or auction house. If you want to buy from an individual seller, make sure your research on the piece is thorough.
Online marketplaces: You can buy art right from your computer using online marketplaces like Masterworks.
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Create Your Investing Strategy
Now it’s time to establish a plan of attack. But what should your art investing strategy be? A lot will depend on your budget, time and display capabilities. Many art investment strategies look very similar to their stock market cousins. Here are a few:
- Speculation: Buying art from lesser-known artists and holding it until they become famous
- Buy-and-hold: Locating old master works or blue-chip pieces and holding them as their value increases.
Purchase Your Piece
Once you have a plan, it’s time to hunt for your first piece. Leverage auction houses, galleries and individual sellers to locate the best piece of art to begin your collection. Negotiate a price within your budget and purchase the piece.
Sell When You’re Ready
A good rule of thumb is to keep any artwork you purchase for at least 3 years while it appreciates. Be sure to keep all documentation proving the work’s authenticity. Display or store your piece properly to prevent damage and sell when you’ve made a significant enough return.
Insuring Your Art Investment
If you're investing in pieces of art, you'll also want to buy art insurance to make sure your investment is secure. If you're a collector of super high end pieces, you may want to purchase a specific type of collector's insurance, whether through a provider like Progressive, which offers fine art insurance, or a dedicated art insurer like AXA XL.
Investing In Art For Further Diversification
The art market is full of illiquid assets and asymmetric information, but that doesn’t mean it should be avoided. Fine art returns have beaten the S&P 500 in recent years and art doesn’t move in lockstep with financial markets.
Becoming an art investor takes substantial capital and time, but the benefits are obvious. Finding an obscure piece of art is a faster way to wealth than banking on a volatile stock. Consider art as both a wealth builder and a way to separate assets from the financial markets.
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