Art as an Alternative Investment
An investment is defined as an asset that appreciates in value over time. By putting money into such an asset, an individual can secure income in the future since their investment grants them a share of the accumulated wealth.
There are various ways to categorize different types of investments, but in the broadest sense, investments can be classified into two categories: traditional investments and alternative investments.
A traditional investment refers to the investment of money into a well-established asset. Well-established means that the asset has been historically proven to have lucrative potential. Traditional investments include cash investments (bank accounts and money market funds), bonds, stocks, and shares.
However, the passage of time has brought with it new investment opportunities. These are referred to as alternative investments, and more and more people are turning to these lesser-known forms of investment to secure future profits.
‘Alternative investment’ is an umbrella term that encompasses all forms of investment outside of cash, bonds, and stocks. So, investment in real estate (either residential or commercial) could be classified as an alternative investment. The same could be said of investment in luxury goods and other commodities.
Another form of alternative investment that is growing increasingly popular is investing in art.
Art as an alternative investment remains a controversial concept for various reasons. This article aims to explain why art can be considered an alternative investment and how such an investment works in practice.
What Makes Art an Alternative Investment?
Art is not considered an investment in the traditional sense because it is not a well-known asset in the same way as cash, stocks, and bonds. However, it can be considered an alternative investment because of recent developments in the art industry.
It’s no secret that famous art pieces by established artists can retail for some impressive prices, but the art industry’s total worth of more than $3,000,000,000,000 might come as a surprise to many.
These days, investors can even use specially formulated indices to track the art industry’s performance – which, as it turns out, now rivals the performance of the stock market when it comes to returns.
The Economics of Investing in Art
As with any other asset, it’s important to consider the numerous economic factors that can impact potential returns on an art investment.
It’s clear that the art industry is currently performing extremely well. However, the price of art is liable to change significantly according to certain factors.
Firstly, the macroeconomic environment must be considered. This refers to the economic, political, and social factors surrounding the art industry.
The price of art is often closely tied to supply and demand. Like luxury goods, the price of a piece of art will increase relative to its exclusivity. This is why original paintings retail for more than copies of the original. As the price of an art piece increases, accessibility is reduced. This, in turn, reduces the demand.
Changes regarding income can impact the demand for, and therefore, the price of art. A recession, for example, will affect the average price of art – although whether the price will increase or decrease isn’t always predictable.
Subjective factors such as taste have an undeniable impact on the monetary value of art. Naturally, specific art pieces will retail for different prices depending on how the art style and subject matter are perceived at a given moment in time. The status of the artist is also a major determining factor when it comes to monetary value.
To complicate matters further, there are actually two separate markets within the art industry. There’s the primary art market, which deals in contemporary art created by living artists. Then there’s the secondary market, where art pieces (usually by more well-known artists) are resold.
The primary market is generally more stable than the secondary market, but investment in this market can present more of a risk because predicting a new piece’s worth in several years’ time is difficult.
Should You Invest in Art?
Investing in art is a personal decision, but it’s one that should definitely be made with the help of an art advisor, especially if you have never invested in art before.
There are, as with any class of investment, pros and cons to investing in the art market.
Compared to other, more traditional forms of investment, investing in art constitutes a risk because its returns are so closely tied to supply and demand. Supply and demand, in turn, is easily (and drastically) impacted by changes in the macroeconomic environment as well as more subjective societal changes in taste.
This makes it hard to predict the movements of the art industry, even with the help of tracking indices.
Regulation (or lack thereof) is another potential risk of investing in art. Traditional investments are tightly regulated. For instance, practices such as insider trading and fraud have serious consequences within the stock market have serious legal consequences. Traditional investments provide safety nets for investors affected by illegal practices.
Conversely, the art market is still largely unregulated. Investors have no access to compensation if a piece of ‘original’ art turns out to be a forgery.
On the other hand, an art investment could be an effective step towards diversifying your investment portfolio. This is because, unlike traditional investments, the art industry is not correlated with the stock market. That means that crashes in the stock market won’t impact the rise and fall of art prices.
If you do decide to invest in art as an alternative asset, you’ll have many decisions to make moving forward. Firstly, you’ll need to decide whether to purchase the art upfront (this will cost you more initially but also opens up the potential for massive returns) or purchase shares in the artwork.
If you do choose to purchase the art yourself, you’ll want to have a strategy in terms of profit. Since art is an illiquid asset, you’ll probably have a long wait ahead of you before you can convert your purchase into cash.
During this time, you’ll need to think about how to store your purchase, which involves weighing the pleasure of hanging the art on your wall against keeping it safe in a protective casing.
Ultimately, it’s important to bear in mind that most individuals who invest in art never sell their purchases for a profit. While the potential for high returns is exciting, it’s also far from guaranteed.
Art is an exciting and potentially very lucrative form of alternative investment. However, the art market is notoriously difficult to predict and regulate, which makes investing in art a risky venture, especially for inexperienced investors.
Prices in both the primary and secondary art markets are impacted by various internal and external factors, including macroeconomics, changes in taste, artistic quality, and artist reputation.
Art is a long-term, illiquid investment, meaning that making a profit from this kind of asset can take decades – if it happens at all.
With that being said, art investments have the advantage of not being correlated with the stock market, so art prices can keep rising even in the event of a stock market crash.
If you have enough passion for art to take the risk and are looking for ways to diversify your portfolio, investing in artwork could be a rewarding next step on your investment journey.