Art and collectibles can be appropriate investments for a portion of an investor’s portfolio. There are some excellent reasons to consider investing in art and collectibles as well as some special risks unique to the sector.
Investing is not generally an activity that is associated with warm feelings. Art can be the opposite.
Owning shares of a high-flying tech company may provide some satisfaction, but unlike the satisfaction of holding an up-and-coming artist’s potential masterpiece. As an asset class, art and collectibles are different from the norm — and may make for some better dinner conversations with your guests.
Art Is Not for Everyone
Owning individual pieces of art requires more work than other investments. It takes a good deal of time, research, and knowledge. That makes it not for everyone, but can make it more attractive for some.
For those who have a keen interest in a form of art or a particular collectible, learning about and researching this interest may be pleasurable. And if it isn’t, then this probably isn’t the best use of your time.
It can be tough to DIY it. If you are interested in art, it would be a good idea to get involved in the art world. There are professionals who can advise you and help make your entry easier. It’s still a steep learning curve. Direct ownership of art and collectibles takes a lot of time.
An Inflation Hedge
Art and collectibles are an alternative investment. Most portfolio models will treat art and collectibles as an inflation hedge asset. They can help protect a portfolio’s value during protracted periods of high inflation.
As an alternative investment, the amount of art that should be within a given portfolio tends to be a small percentage. That makes ownership of high value pieces most appropriate only for high net worth investors.
Art and collectibles can sometimes outperform other investments. Carefully selected investments may be more than an inflation hedge. There can be an upside as well.
Art and collectibles are also illiquid. The last thing an investor needs is to try to quickly sell an asset with a small market. That is not likely to go well. Art and collectibles should not be held except as long-term illiquid investments.
Beware the Bias in Art and Collectible Investments
There are two biases that potential investors in art or collectibles should be most aware of: the sample selection bias and overconfidence.
There are indices that report the performance of art sold at auction across periods of time. At first glance, it could make investing in art appear very attractive. That’s where the bias comes in.
Art does not generally change hands often; pieces are bought and held. Oftentimes they pass as part of an estate or are gifted as part of an estate strategy. Art that has not appreciated in value or has even declined in value rarely makes it to auction.
The performance of art sold at auction is representative of only a slice of the market, an above average slice at that.
The sample of art sold at auction is not representative of the entire market and should be considered with caution. The sample is biased toward higher appreciation pieces.
And then there is overconfidence bias. It has been said in many veins that a little knowledge is a dangerous thing; that is likewise true here. Seasoned experts don’t do well predicting long-term values. Novices with a little knowledge are unlikely to fare better. Trust your gut, but keep it in check.
High Costs of Ownership
Art is frequently sold at auction or through dealers. Dealers make their money marking up art. It can take a good deal of appreciation to have your piece get to a value that it would bring in the open market.
Auctions may better reflect a piece’s true value — except auctions are also expensive. Art frequently has a hefty buyer’s premium, and there will likely also be a seller’s premium if you bring it back to auction later. These are significant percentages, and it frequently takes some time for appreciation to recoup your costs.
Art and collectibles frequently have other costs of ownership. They’ll need to be insured. They may also need specific care and other ongoing costs. You can’t just toss the masterpiece in the basement and expect to maximize future value.
Depending on the piece, it may need to be in a climate-controlled environment. Some art and collectibles will have more demanding storage requirements than others. In all cases, you should give consideration to maintaining your investment to maximize future returns.
Alternative Forms of Ownership
Fractional ownership is an option for those who don’t want to assume the full responsibility for the care and maintenance of high value pieces. Fractional ownership lowers the barrier to entry and allows investors to own a piece of a significant work they might otherwise find unobtainable.
Fractional ownership also allows investors to better diversify their art holdings. Rather than placing their entire inflation hedge allocation into a single piece they can own parts of several.
Even in art, diversification matters.
Non-fungible tokens (NFTs) are another option for investing in art. NFTs are encrypted digital assets where the NFT serves as a unique proof of ownership. NFTs are rapidly becoming more widely used and there are opportunities to own a small piece of some more significant works.
The costs and work of ownership don’t go away with fractional ownership. The work is shifted elsewhere, but somehow the costs will still be accounted for. If you are considering fractional ownership, look very closely at how costs are handled. There is still no free lunch.
The Bottom Line on Art and Collectible Investments
Investing in art and collectibles can be fun and exciting. If an investor has interest and appreciation for a particular art form or type of collectible, it can be rewarding. It can have purpose more than just a hobby.
Hobbies are good and fine and important in their own right, but moving from hobby into the actual investment sphere can take that to a whole new level. That might or might not be something you want.
Even for those who don’t take pleasure in the work, art and collectibles can be part of a portfolio through fractional ownership. There are reasons the portfolio models recommend alternative and inflation hedge investments.
If we believe in the science behind the portfolio models, then we should consider following them. And maybe have some fun at the same time.
