Diversifying Your Portfolio: Investing In Art
Stocks, bonds, cash and other accounts are common places for individuals to allocate their investments. However, art can also be a viable investment option.
In 2013 alone, people from all over the world spent about $63 billion on art. Of those who bought art, 75 percent at least partially viewed the art as an investment opportunity. If you are considering investing in art, be sure you are aware of the factors that may influence your decision.
Collecting vs. Investing In Art
Collecting is typically for show or display while pursuing a passion. With this, you buy what you personally like and don’t necessarily focus on the price tag. However, investing in art has a much different approach. Investors may not have a personal or emotional attachment to a piece. Instead, they will see the potential to make a profit.
What to Know Before You Buy
Appraiser: Unlike other investment vehicles, art likely will not come with an extensive prospectus or other historical financial information. If you are interested in a piece, hire a third-party appraiser to ensure that you are paying a fair price relative to the item’s market value. The art market is notoriously flooded with counterfeits, so hiring an appraiser will also be key in determining the authenticity of the piece.
Risk and Return: In August 2013, the Stanford Graduate School of Business conducted a study to assess what the average rate of return is for artwork. The study showed that from 1972 to 2010, the average return on a piece of art was roughly 6.5 percent. However, a study in 2010 by the VU University in Amsterdam surveyed nine asset classes, including corporate bonds, hedge funds and private equity, and found that art had the highest volatility by a significant margin.
Diversification: A main benefit of investing in art is the degree to which it is diversified from the rest of the stock market. While the value of art is tied to the overall health of the economy―as disposable income decreases during economic hardship―it is not directly affected by a downturn in stock or bond performance. For investors who already have capital in stocks, bonds, cash and other investments, further diversifying in art might make financial sense.
Investing in Art
Capital Gains: When selling a piece of artwork, it’s important to remember that the profits must be treated as capital gains. This is because you are making money on an investment. Capital gains are considered “short-term” if the asset is held for a year or less before resale or “long-term” if the asset is held for over a year before resale. Like most investments, short-term gains on art are taxed at an investor’s normal income rate. However, long-term capital gains from selling art are taxed at 28 percent (not including surtax)—a higher rate than what most securities enjoy.
Illiquidity: Finding a buyer for art that you own may be difficult. If you plan on selling artwork, be patient and wait for the right buyer at the right price.
Additional Costs to Consider
When investing in art, there are more costs than simply the purchase price. In the long run, the net gain from investing in art will be reduced by the total expenses you pay in maintaining and protecting it.
Transaction costs: In addition to just the “sticker price,” there are many more initial costs when purchasing art. Depending on the market value of the artwork, commission can cost up to 25 percent. Any regional sales tax will also be tacked onto the purchase amount.
Frame: While the cost of a frame will vary depending on personal preference, size and value of the artwork, plan on setting aside at least a few hundred dollars for a good frame.
Display case: For artistic mediums like sculptures, a display case may be needed. Similar to framing, the cost will vary depending on size, the quality of the case and the value of the art. A secure display case can cost hundreds or thousands of dollars.
Insurance: Not having insurance coverage on your art adds risk to the investment. While some homeowners insurance policies automatically cover art, it is best to check your own policy to make sure that fine art is covered for its full value. If needed, you can purchase additional lines of insurance for a collection or specific pieces of art; rates will vary depending on location, size of the collection and other factors.
Because of its potentially high costs, high volatility and generally low liquidity, art is an investment that is not suited for every portfolio. Like any investment, art carries the risk of loss of principal value. If you are considering investing in art, seek professional guidance from your financial advisor.
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Tunde Ogunlana is a certified fund specialist and family wealth advisor at Axial Family Advisors.