Art investing goes beyond finding the perfect watercolor to hang in your dining room. Art can occupy an important space in your portfolio, serving as a hedge against inflation, adding diversification and reducing your portfolio’s volatility.
Unfortunately, many investors assume they’re locked out of the art marketplace, considering art to be an investment for the ultrawealthy. As a result, most individual investors don’t own art as an alternative asset class.
Additionally, the onset of the coronavirus pandemic presented a challenge for the art market, with global sales of artwork and antiques in 2020 totaling just $50 billion, a 22% decrease from the previous year, according to the Art Basel and UBS Art Market Report.
“Art as an asset class is typically underinvested in because investors have limited access to the highest-quality works,” says Cynthia Sachs, CEO and chief investment officer at Athena Art Finance Corp.
While most investors don’t have millions of dollars for a Claude Monet painting, there are now opportunities for them to allocate funds to this unique asset class. And while 2020 was a difficult year for the traditional art market, online sales reached a record $12.4 billion, double that in 2019.
With the growing art market and proliferation of platforms that are providing a means of entry to this investment, you may be curious about how to navigate the market dynamics of this alternative asset class.
Here’s what you need to know about investing in art:
— Characteristics of art investments.
— How to invest in art.
— What art investors should know about NFTs.
— How to evaluate art investment opportunities.
Characteristics of Art Investments
Art can serve many roles within an investment portfolio, making it an attractive asset for retail investors.
First, art can act as a portfolio diversifier. By allocating a portion of your portfolio to this asset, you’re reducing your risk exposure by spreading your money across different investments.
This is important because art is an asset class is that not correlated to other major asset classes in the stock market. This means that when traditional assets like stocks or bonds perform poorly, alternative investments like art tend to hold market value.
Art as an investment can also be a way for investors to preserve their wealth, experts say. Art serves as a hedge against inflation.
“Artworks are a physical asset, and physical assets tend to perform well in inflationary times,” Sachs says. “And given that we’re now going through a inflationary phase in our macroeconomic cycle, art can be a very nice inflation hedge.”
While there’s risk with any investment, one of the benefits with art is it’s not an asset that’s largely impacted by market volatility. Unlike equities, which are sensitive to market movements, the art market has steadily grown over the years, and traditional physical fine art tends to maintain or increase its value over time.
You will not see the same volatility in the art market as in the equity market because the blue-chip art market has rare, desirable assets, Sachs says. So art will continue to have some support in the event of negative market news.
These benefits, however, can backfire. One of the risks associated with art investments is their lack of liquidity. If you want to sell a physical piece of art, you would do so through an art gallery, auction house or an art collector. This can be a time-consuming process.
Given that art is not an asset that’s bought and sold frequently, Sachs says, this poses liquidity risk that you don’t have in the equity market. This makes art more of a buy-and-hold asset class.
How to Invest in Art
Investors may access and purchase art in several types of markets. The traditional way has been to work with a dealer, use an auction house or go to art fairs.
One expanding area of the market, however, is the digital art arena. This new space brings more liquidity to the market.
Digital platforms such as Yieldstreet and Masterworks even allow you to buy and sell fractional shares of different types of artwork, so you don’t have to cut a large check for a piece of fine art.
For those who want to bet on investment-grade art, they can start by working with a robo advisor that offers investment vehicles for art investments. These robo advisors purchase blue-chip art and list it on their platform for individual investors to purchase shares of the artwork for a fee, which goes towards managing and insuring the investment.
What Investors Should Know About NFTs
Another new area in the digital art market is NFTs, or nonfungible tokens. These art pieces are nonphysical, digital forms of traceable and verifiable works of art. The benefit of having an art NFT is owning artwork that has digital integrity that cannot be replaced.
Art NFTs are supported by the blockchain network. Blockchain offers transparency, authenticity and more liquidity, which allows investors to easily transact.
Some of the world’s biggest artworks, from artists such as Leonardo da Vinci, Vincent van Gogh, Monet and others, are available on the NFT market.
Emerging artists also see the merits of the digitization of art. Mike Winkelmann, who goes by the name Beeple, is a bestselling NFT artist who auctioned a collage called “Everydays” for a record-setting $69 million. Art NFTs gives artists the opportunity to sell their work directly to consumers, and they give individual investors access to these pieces in an open marketplace.
NFTs offer a new approach to investing in art that many people are not familiar with. Athan Slotkin, an entrepreneur based in Los Angeles, helps break down how you can purchase an art NFT:
1. Visit an NFT marketplace. Investors interested in art NFTs can go to websites that allow them to directly buy from artists. Alternatively, they could go to a marketplace that offers art NFTs.
“OpenSea is a good marketplace that aggregates NFTs from a variety of marketplaces,” says Nick Emmons, co-founder and CEO of Upshot, a platform for crowdsourced NFT appraisals. “Going directly to a specific marketplace like MakersPlace or SuperRare can be a good idea too, as they often provide useful information about the art itself.”
2. Fund a digital wallet. Regardless of the platform used to purchase this asset, Slotkin says, you need to create a digital wallet and add currency to be able to spend. Since NFTs are typically an Ethereum-based asset, you can use Ether tokens as a form of payment.
3. Select your favorite art piece and make a bid. After getting set up, you can browse the site and purchase the product you’re interested in.
How to Evaluate Art Investment Opportunities
Art is a diverse market, so experts say it’s important to understand artists, their markets and how art should be managed.
It could be helpful to familiarize yourself with a favorite artist to see how they have grown their brand and whether that growth is sustainable.
As you do your due diligence, Sachs says, “you want to look at artwork that has been traded multiple times (to) see if you can get true comparables as to what growth rates are.” Given that you will likely be holding fine art for a while, understanding the performance of similar pieces can be a helpful gauge of what returns you can expect.
Emmons suggests considering several helpful data points when evaluating art.
First, you have to consider whether there’s demand from art collectors to buy the artist’s pieces. “If top collectors are regularly buying pieces from an artist, that is a strong signal that that artist’s pieces will continue to appreciate in the long term,” Emmons says.
For NFTs, it’s important to invest in products created by artists who have a long-term vision for what they plan to do with their art to add value.
For investors who want to get creative in art NFT investments, Slotkin encourages them to look into emerging technologies that support the creator economy. He says to look at stocks that enable that transformation and that market, pointing to Adobe Inc. (ticker: ADBE) as an example.
“For people who are trying to create NFTs, they’re going to need a really good software to be able to create those,” Slotkin says.
Other costs to consider when investing in physical art include those related to the management of it. To maintain the value of the piece, proper storage is required. This maintenance expense should be factored into the valuation of the art work. At the end of the day, you also have to like the art piece you are buying and enjoy owning it whether its physical or digital.
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