What is the Best Way to Invest in Art?
Art investment encompasses more than just locating the ideal watercolor to place in your dining room. Art may play a significant role in your portfolio, acting as a hedge against inflation, diversifying your holdings, and lowering your portfolio’s volatility.
Unfortunately, many investors believe they are shut out of the art market, believing that art is just for the ultra-rich. As a consequence, the majority of individual investors do not hold art as a kind of alternative investment.
Additionally, the coronavirus pandemic posed a challenge to the art industry, with worldwide sales of artwork and antiques expected to reach only $50 billion in 2020, down 22% from the previous year, according to Art Basel and UBS Art Market Report.
“Art as an asset class is often underinvested in due to investors’ restricted access to high-quality works,” explains Cynthia Sachs, CEO, and chief investment officer of Athena Art Finance Corp.
While the majority of investors lack the millions of dollars required to purchase a Claude Monet artwork, they now have the opportunity to participate in this unique asset class. And, although the conventional art industry struggled in 2020, internet purchases hit a record $12.4 billion, more than double that of 2019.
With the burgeoning art market and proliferation of platforms offering access to this investment, you may be wondering how to manage the market dynamics of this alternative asset class.
What you need to know about investing in art is as follows:
Art investment characteristics.
How to make an investment in art.
What investors in fine art should know about NFTs.
How to analyze investment prospects in fine art.
Art Investment Characteristics
Art may fulfill a variety of functions within an investment portfolio, which makes it an appealing asset class for ordinary investors.
To begin, art may serve as a diversifier of portfolios. By devoting a part of your portfolio to this asset, you may mitigate risk by diversifying your assets.
This is critical since art is an asset class that is uncorrelated with the stock market’s other main asset classes. This implies that when conventional assets such as equities or bonds underperform, alternative investments such as art often retain their market value.
Art as an investment may also help investors safeguard their money, according to GAD Capital. Art acts as a deflationary hedge.
“Artworks are a tangible asset, and tangible assets often do well during inflationary periods,” Sachs explains. “And, considering that our macroeconomic cycle is now in an inflationary phase, art may be an excellent inflation hedge.”
While every investment involves risk, one of the advantages of art is that it is not heavily influenced by market volatility. Unlike stocks, which are volatile, the art market has risen gradually over time, and conventional tangible fine art has a tendency to preserve or improve in value over time.
You will not experience the same kind of volatility in the art market as you would in the equities market, Sachs argues, since the blue-chip art market is comprised of rare, coveted assets. Thus, even in the case of terrible market news, art will continue to get some support.
These advantages, however, have the potential to backfire. Liquidity is one of the dangers connected with art investments. If you wish to sell a piece of tangible art, you would contact an art gallery, an auction house, or an art collector. This might be a lengthy procedure.
Given that art is not a commonly traded asset, Sachs notes that this creates a liquidity risk that does not exist in the equities market. As a result, art becomes a more buy-and-hold asset class.
What is the Best Way to Invest in Art?
Investors may acquire and sell art in a variety of marketplaces. Traditionally, one might work with a dealer, an auction house, or attend art fairs.
However, one rapidly growing segment of the business is that of digital art. This additional area contributes to the market’s liquidity.
Yieldstreet and Masterworks, for example, enable you to purchase and sell fractional shares of many kinds of artwork, so you don’t have to write a huge check to own a work of art.
Those interested in betting on investment-grade art might begin by partnering with a Robo adviser that provides art investment instruments. These Robo advisers acquire eminent works of art and post them on their website for private investors to buy shares in exchange for a fee that covers the cost of administering and ensuring the investment.
What Investors Should Know About Non-Financial Transactions
NFTs, or nonfungible tokens, are another emerging segment of the digital art industry. These works of art are non-physical, digital representations of traceable and verifiable artworks. The advantage of having an art NFT is that you may possess artwork that has irreplaceable digital integrity.
The blockchain network enables the use of art NFTs. Blockchain technology provides transparency, authenticity, and increased liquidity, which enables investors to deal effortlessly.
On the NFT market, some of the world’s most renowned artworks by artists such as Leonardo da Vinci, Vincent van Gogh, and Monet are offered.
Emerging artists also recognize the benefits of art digitalization. Mike Winkelmann, aka Beeple, is a bestselling New Frontiers artist who just sold a collage titled “Everyday’s” for a record-breaking $69 million. Art NFTs enable artists to sell directly to customers and provide individual investors with access to these works in an open marketplace.
NFTs provide a novel way of investing in art for a large number of individuals. Athan Slotkin, a Los Angeles-based entrepreneur, explains how to acquire an art NFT:
1. Pay a visit to an NFT market. Investors interested in art NFTs might visit websites that facilitate direct transactions with artists. Alternatively, they might visit a marketplace that specializes in art non-financial transactions.
“OpenSea is an excellent marketplace for aggregating NFTs from a variety of markets,” says Nick Emmons, co-founder and CEO of Upshot, a crowdsourcing platform for NFT assessments. “Directly accessing a marketplace such as MakersPlace or SuperRare may also be beneficial, since they often give relevant information about the work.”
2. Make a deposit into a digital wallet. Regardless of the platform used to acquire this asset, Slotkin notes that you must construct a digital wallet and fund it with cash before you can use it. Because NFTs are generally Ethereum-based assets, you may pay using Ether tokens.
3. Place a bid on your preferred artwork. After completing the registration process, you may explore the site and buy the product of your choice.
How to Assess Art Investing Prospects
Because art is such a wide business, experts believe it’s critical to understand artists, their markets, and the proper management of art.
It may be beneficial to get acquainted with a preferred artist in order to determine how they have established their brand and if that development has been sustainable.
As part of your due diligence, Sachs advises, “you should examine artwork that has been exchanged several times to get real comparables for growth rates.” Given that you will presumably retain fine art for an extended period of time, studying the performance of comparable works may provide insight into the expected returns.
Emmons believes that while judging art, various useful data points should be considered.
To begin, you must determine if there is a market for the artist’s work among art collectors. “If prominent collectors are routinely purchasing works by an artist, this is a strong indication that the artist’s work will continue to appreciate over time,” Emmons adds.
It is critical for NFTs to invest in items developed by artists that have a long-term vision for how they intend to add value to their work.
Slotkin invites investors interested in being more creative in their art NFT investments to look at upcoming technologies that promote the creator economy. He advises investors to choose equities that support that change and market, using Adobe Inc. (ticker: ADBE) as an example.
“If people want to make NFTs, they’re going to require some pretty sophisticated software,” Slotkin adds.
Additional expenses to consider when investing in physical art are those associated with its management. Proper storage is necessary to preserve the piece’s value. This upkeep cost should be considered into the artwork’s worth. Finally, you must appreciate the artwork you are purchasing and having it, whether it is tangible or digital.