Art is not only a form of expression, but also a valuable asset class that can offer many benefits to investors. In fact, art and collectibles have become one of the fastest-growing segments of wealth in the world, especially among the ultra-high net worth individuals (UHNWIs).
According to a report by Deloitte and ArtTactic, in 2022, the wealth linked to art and collectibles for UHNWIs was approximated at $2.174 trillion USD. This figure is projected to reach nearly $3 trillion by 2026, driven by the expanding number of UHNWIs and their increased allocation of wealth towards art and collectibles.
With luxury art assets becoming integral to the art and finance domain, a more substantial portion of wealth will be overseen by this sector. In fact, approximately 63% of wealth managers have already incorporated art into their wealth management offerings, as they recognize the potential of art as an alternative asset class that can enhance the performance and diversification of their clients’ portfolios.
The Art Basel and UBS Survey of Global Collecting in 2023 reveals intriguing trends in art acquisition. Paintings dominate the market, with 58% of High Net Worth Individuals’ (HNWIs) total art expenditure, while other mediums like sculptures and installations also play significant roles.
Additionally, the allocation of wealth to art by HNWIs varies with wealth levels, with those possessing over $50 million dedicating nearly 30% to art, indicating a stronger preference for art as an asset class among the wealthiest collectors. This data aligns with the increasing importance of art and collectibles in wealth portfolios, as art continues to captivate the interest of affluent investors globally.
In this article, we will explore the reasons why you should consider investing in art, the challenges and risks involved, and the best ways to get started with contemporary art investing in 2024.
For those interested in the realm of digital art investing, such as NFTs, please refer to our prior articles that offer a deep dive on the topic: NFT Investing: The Ultimate Guide and Investing in NFTs: How to Get Started.
Art as an Asset: 4 Strategic Reasons to Invest
Art investing has become increasingly popular in recent years, as more people recognize the potential of art as an alternative asset class. Here are some of the main advantages of investing in art:
1. Excellent Diversification Opportunity
Diversification is a risk management strategy that involves spreading investments across different types of assets, such as traditional stocks, real estate, and alternative asset classes such as art. The goal is to reduce the overall risk of the investment portfolio by not relying too heavily on the performance of a single investment.
Art is a good candidate for diversification because it has a low correlation with other asset classes, meaning that its value does not move in sync with the stock market, the economy, or other factors that affect most investments.
According to a report by Masterworks, the relationship between contemporary art and fixed-income investments showed a minimal correlation of 0.15 from 1985 to 2021. In the same timeframe, the correlation between contemporary art and developed market equities was even lower, at -0.04, indicating a nearly inverse relationship. Art can also provide a hedge against inflation, as its value tends to increase over time regardless of the changes in the purchasing power of money.
For a deeper understanding of how alternative assets like art can play a vital role in portfolio diversification, explore our detailed analysis in the featured article here.
2. The Art Market is On The Up and Up
In 2022, the global art market achieved a substantial milestone by generating nearly $68 billion U.S. dollars. This surpassed pre-COVID figures, marking the second-highest value in the past 15 years. The US, UK, and China make up for about 80% of the total sales value.
In 2023, art took the lead in the Knight Frank Luxury Investment Index (KFLII), even as the growth of other “investments of passion” (watches, coins, cars, wine, etc.) slowed or dropped.
These trends indicate that the art market is resilient and robust, and that there is a strong demand for art among collectors and investors alike. The art market is also becoming more accessible and transparent, thanks to the emergence of online platforms, digital tools, and data analytics that enable more people to buy and sell art with ease and confidence.
3. Art Can Outperform the S&P 500
One of the most common benchmarks for measuring the performance of investments is the S&P 500, an index that tracks the performance of 500 large companies listed on the US stock market. The S&P 500 is widely regarded as a proxy for the overall health of the US economy and the stock market.
However, art can sometimes outperform the S&P 500, especially in the long term. Between 1995 and 2022, the stock market index S&P 500 yielded an average annual return of 9%, while contemporary art delivered an average annual return of 12.6% over the same period.
This means that art can offer higher returns than the stock market, as well as lower volatility and risk. Of course, this does not mean that art is always a better investment than stocks, or that every piece of art will appreciate in value. Art investing requires careful research, analysis, and selection, as well as patience and passion.
4. Inflation Protection
Inflation is the general increase in the prices of goods and services over time, which reduces the purchasing power of money. Inflation can erode the value of your investments, especially if they are denominated in fiat currency, such as the US dollar.
Art, on the other hand, can serve as a robust hedge against inflation and recession. This is because the value of art may not be inherently tied to the global economy, but rather to the subjective preferences and tastes of collectors and investors. Art can also retain its physical and aesthetic qualities over time, unlike some other assets that may deteriorate or become obsolete.
In the latter part of 2022, the art market rebounded and surpassed levels seen before the pandemic. This underscores that the value of art may not be affected by the economic downturn caused by the COVID-19 crisis.
The Downsides of Investing in Art
While art investing can offer many benefits, it also comes with some challenges and risks that you should be aware of before diving in. Here are some of the main drawbacks of investing in art:
Lack of Liquidity
A key drawback of art investing is that art is a somewhat illiquid asset. This means that it is not easy to convert it into cash or sell it quickly. Should the need arise to obtain cash or divest your investment, the process involves selling through channels such as an art gallery, auction house, or private art collector. Selling an art asset can be a time-consuming endeavor, making art better suited for long-term investments.
Cost of Upkeep
Maintaining an art collection involves more than just appreciation for aesthetics; it requires a commitment to preservation. The upkeep of art can incur considerable costs, including state-of-the-art storage facilities to protect against environmental damage, professional cleaning services to maintain condition, comprehensive insurance policies to safeguard against loss, and robust security measures to prevent theft or vandalism.
These ongoing expenses are an essential part of investment calculus, as they ensure the artwork retains its value and cultural significance over time. To understand these costs in the context of today's art world, it can be enlightening to explore the strategies of contemporary galleries, which are adapting to not only preserve art but also present it in an increasingly digital landscape
Appreciation is Unpredictable
A final risk of art investing is that the appreciation of art is unpredictable and subjective. Art investment exhibits characteristics akin to a lottery. Most artwork only appreciates at a moderate rate, some actually loses value, and a very small fraction realizes extremely high returns.
The value of art is determined by various factors, such as the reputation of the artist, the quality and rarity of the work, the condition and provenance of the piece, the trends and tastes of the market, and the supply and demand of the art. These factors can change over time and are not always easy to measure or predict. Therefore, art investing requires a lot of research, expertise, and intuition, as well as a willingness to accept uncertainty and volatility.
How to Get Started with Art Investing
If you are interested in art investing, you may be wondering how to get started. Here are some steps you can take to begin your art investing journey:
Figure Out What You Like
Do you like certain styles or types of art? Contemporary artists, famous artists, up-and-coming artists? Particular colors? Art featuring specific topics — animals, flowers, countries, etc.? In the vast sea of opportunities, it’s easiest to start with an idea of what you want to collect so you can build a curated collection of original artwork over time. Not only will this help you focus your spending, it may make your collection more sellable in the future.
Determine Your Goals
What do you aim to achieve as an art investor? Are you seeking profit, do you want to be able to pass it down to family, or is your primary interest in building an art collection for enjoyment? Similar to any investment, art cannot guarantee returns, so it’s crucial that your interest in the art you invest in is driven by both its intrinsic value and its potential return on investment. This article explains how to calculate the return on investment (ROI) of your assets.
Set Your Budget
There are a wide variety of art prices. You don’t have to be a millionaire to buy art. The survival of the art market through the pandemic shows that smaller budgets can work. Before you start shopping, determine the maximum and minimum investment you are comfortable spending, and restrict your purchases to that specific range within your budget.
Time to Shop
There are several different ways to access art:
- Physical art ownership: If you want to possess physical pieces of art, opting for direct purchase at auctions, galleries, or art fairs is the conventional approach. Just be aware that this approach requires an understanding of art valuation and appraisal, so for big purchases you may want to work with an art dealer or wealth manager with art investing experience.
- Fractional art ownership: Fractional ownership platforms such as Masterworks are becoming increasingly popular alternatives to physical art collection. This is a more hands-off and potentially less capital-intensive avenue to invest in art. You can buy shares of artworks that are owned and managed by the platform, and benefit from the appreciation of the art without having to deal with the hassle of storage, maintenance, or selling. However, you should also be aware of the fees, risks, and regulations involved in this type of investment, as well as the lack of control and ownership over the physical work.
- Art financing: Another way to indirectly access the art market is by offering financial support for an art transaction. This can involve lending money to an art buyer or seller, or taking a stake in an art fund or company. This entitles you to interest and eventual repayment of the principal amount, as well as a share of the profits if the art appreciates in value. However, this also exposes you to the credit risk of the borrower or the art asset, the legal and regulatory issues that may affect the art transaction or ownership, and the limited liquidity and exit options for your investment.
Monitor and Grow Your Investment With Kubera
Investing can be tricky and risky, especially when it comes to art. You may encounter advisors who charge high fees or give bad advice, or you may face challenges and uncertainties in the art market. If on the other hand you choose self directed investing, the responsibility is entirely on you when it comes to investment choices - including how and when to invest in art. That’s why you need a reliable and user-friendly platform that can help you manage your art investment with confidence and ease.
That’s where Kubera comes in. Kubera is a modern and innovative platform that allows you to track all your assets, cash, and investments from a single dashboard. Whether you invest in traditional stocks, bonds, and funds, or alternative assets such as crypto, real estate, art, collectibles, domains, and more, Kubera can help you monitor and grow your investment portfolio.
Here are some of the features that make Kubera the best platform for art investors:
- Keep art as part of your investment strategy, track its value, and keep your portfolio balanced: Kubera lets you add art as an asset to your portfolio and track its value. You can also see how your art investment compares to other asset classes, and adjust your portfolio allocation accordingly.
- Track all of your assets, cash, and investments from a single dashboard: Kubera integrates with thousands of modern bank and brokerage accounts, and supports various currencies and regions. You can also add any custom or alternative assets that you own or invest in, such as art, VC & PE investments, and track their value and performance. Kubera gives you a clear and comprehensive overview of your net worth and portfolio.
- Get automatic valuations for your art assets based on the latest market data and trends: Kubera uses advanced algorithms and data sources to provide you with accurate and up-to-date valuations for your art assets. You can also customize the valuation method and frequency for each art asset, and add notes and documents to keep track of your art collection.
- Set alerts and notifications for your assets and portfolio performance: Kubera allows you to set alerts and notifications for your assets and portfolio performance, so you can stay on top of any changes or opportunities in the art market.
- Model portfolio performance and evaluate investment decisions: Kubera lets you simulate, model and plan for future financial scenarios which can help you make better and more informed financial decisions and investment strategies
- Share your portfolio with your trusted contacts and beneficiaries in case of emergency: Kubera offers a secure way to ensure your portfolio is accessible to your trusted contacts and beneficiaries during emergencies. This feature provides peace of mind, knowing that in unexpected situations, your assets will be safely transferred to your designated loved ones.
Art investing is a fascinating and rewarding way to diversify your portfolio, enjoy the beauty and culture of art, and potentially earn high returns. However, art investing also comes with some challenges and risks that you should be aware of and prepared for. By following the steps and tips outlined in this article, you can start your art investing journey with confidence and success. And by using Kubera as your investing platform, you can monitor and grow your art investment with ease and peace of mind.
Ready to take your art investment to the next level? Sign up for a trial and get started with Kubera today!
