Is Investing in Art a Good Idea?

By MP Dunleavey · May 30, 2024 · 9 minute read

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Is Investing in Art a Good Idea?

Investing in art can be a good idea, but there are a number of options and factors to take into account, such as: the type of art investment you might choose (i.e. art funds vs. individual works of art), the art market climate, your familiarity with artists and trends in the art world, and more.

Generally speaking, art is considered an alternative investment. The art market does not move in sync with traditional stock and bond markets, and therefore owning art in some capacity can provide portfolio diversification. But like any alternative asset, investing in art also comes with risks.

The art market is highly illiquid, art itself is not well regulated, collectors’ tastes are fickle — and thus what determines the value of certain works of art can be harder to predict than, say, shares of stock. So while investing in art could be a smart move, it requires careful research and a deep understanding of this asset class.

How Big Is the Art Market?

Most people are familiar with the high-priced sales of some pieces of art. Works by well-known and historically revered artists can sell for millions — as can contemporary works by artists who are increasingly popular. But despite a few big headliners, the art market is fairly small.

According to a 2023 industry report, global art sales increased by a modest 3%, to $67.8 billion in 2022. Sales were more robust in the United States in 2022, with 8% growth to $30.2 billion year over year. The U.S. is the world’s largest art market, with the U.K. and China being second and third largest.

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Is Art a Good Investment?

Whether art is a good investment to a large degree depends partly on the work of art. For example, just as there are blue-chip stocks, there are blue-chip artworks that typically command higher prices and offer the potential for steady appreciation (although given the volatility of the art market, there are no guarantees).

But investing wisely in art also depends on the investor, and the vehicles they choose. For example, investing in individual art — similar to investing in individual stocks — requires a deep familiarity with that product and its market, as well as understanding the risks involved.

While you can invest in individual works of art, the value of any piece of art depends on its rarity, whether the artist is in demand, the historical and cultural significance of the work, as well as trends and market conditions.

However, these days investors can also choose to invest in art through art-related funds (similar to mutual funds), and fractional shares of art, which is analogous to investing in fractional shares of stock.

It’s also important for would-be investors to understand the role of collectors.

Art Collectors vs. Art Investors

The difference between art collectors and art investors is important to grasp. Most types of asset classes attract investors alone (with some exceptions, e.g. collectibles). Typically you don’t hear about people collecting stocks or mutual funds, for example.

In the case of the art market, however, collectors can play a role in art market trends as well as valuations. While investors, particularly high net-worth investors, may also influence sales, many collectors are long-time participants in the art market with years of familiarity with the ins and outs of many sectors, artists, dealers, galleries, domestic and international art fairs, and more.

Collectors may be steeped in a certain era or style (e.g. medieval religious statuary or Impressionist paintings), and committed to owning works long-term — for decades, or even generations.

By contrast, art investors may aim to acquire works that will gain value in a relatively short period (i.e. within a few years). This is where different types of art investment vehicles can come into play.

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What Makes a Good Art Investment?

Investing in art requires a certain mindset, and doing your due diligence to size up what constitutes the best opportunities for you, depending on your goals. It’s also important to understand some of the newer investment vehicles.

Individual Works

Investing in individual works requires knowledge of the artist, their current status (e.g. are they in demand or have they fallen out of favor?), the relevance or importance of a given work, and a sense of whether it’s overvalued or undervalued.

The risks of choosing individual works include the possibility of buying a fraudulent piece, the cost of owning and maintaining the work (including storage and insurance), and the uncertainty of knowing whether any given work will hold its value.

Buying individual works can also come with added charges, similar to investment fees (e.g. commissions and other costs). And given the fragility of most art, there is also the risk of physical damage or total loss.

Fractional Shares of Art

Owing to the high cost of purchasing and owning blue-chip works of art, it’s possible to buy fractional shares of art. This option is relatively new, but fractional shares of art are available on a growing number of platforms.

There are various systems for buying fractional art shares. One common way it can work: Investors purchase fractional shares of a work by a specific artist. The platform handles the maintenance and storage of the art, which is held for a period of time and then sold, ideally for a profit. If the sale is profitable, investors get a percentage of the gain, net of fees, commensurate with the percentage of the work they own.

The risk of buying fractional shares of art is that, as with any investment, there are no guarantees of a return. In addition, this is a financial strategy — fractional owners never have the pleasure of actually possessing the work.

Art Funds

Similar to traditional mutual funds and ETFs, an art fund is a type of pooled investment fund. But unlike conventional funds, art funds tend to be a long-term proposition. Art funds are structured typically as closed-end funds, but with a twist: investors typically contribute their capital over a period of three to five years, often with no returns for another specified time period (terms vary).

These funds are highly illiquid, and (in addition to the unpredictability of the art market itself) there are substantial risks to locking up your capital for what could be years, for an unspecified return upon redemption.

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Risk Tolerance

Individual investors interested in exploring this type of alternative investment need to consider many factors, especially their stomach for risk. While all investments come with some degree of risk, the spectrum is wide when it comes to art, and there are many unknowns.

Perhaps the biggest factor is the capriciousness of the art world as a whole. For a couple of years, digital art, especially non-fungible tokens (NFTs), spiked in popularity and many people sold digital art at a profit — only to see demand plunge, taking prices along with it.

It’s a cautionary tale. Yet there is always the potential for a rebound, if digital art regains its appeal, or “antique” NFTs become a thing.

Investing in art also includes risk factors specific to owning fragile physical items, as well as the risk of total loss of capital if the investment you choose falls out of favor, or turns out to be a fake — or if a given fund manager makes a bad call.

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Pros and Cons of Investing in Art

Taking all of the above into consideration, it’s important to weigh the advantages and disadvantages of investing in art.

Advantages

Art offers the potential for substantial returns.

There are many new opportunities for investing in art; would-be investors can consider art funds, fractional shares of art, and more.

Investing in art may offer portfolio diversification.

Some countries may offer tax breaks on art sales.

If you enjoy art and the art world, this type of investing can offer the potential for fun, travel, and aesthetic gratification.

Disadvantages

The art world is volatile and there is no way to know for sure what a given artist or work may be worth now or in years to come.

It’s difficult to authenticate works of art, and the risk of forgery is high.

Investing in art-related funds, stocks, or fractional shares are still relatively new types of instruments, and terms (fees, redemptions, illiquidity) may not be favorable.

Many types of physical artworks can be damaged or destroyed.

The current tax treatment of art gains in the United States is higher than long-term capital gains rates.

Pros

Cons

Potential for gains Risk of losing money owing to art market volatility
New ways to invest in art; i.e. art funds, fractional shares Like some alternative investments, art is not heavily regulated by the SEC
May provide portfolio diversification Highly illiquid and opaque
Some countries offer tax breaks on art sales Art gains subject to higher taxes than long-term capital gains
Owning art is aesthetically gratifying Risk of damage and loss

Returns on Art Investments Over Time

Just as the art world is expanding to offer new options to investors, it’s also adopting certain investment world conventions, such as art indices. Now investors can consider the data provided by an index such as the Sotheby Mei Moses Index, which was modeled on the Case-Shiller Index for home prices.

That said, individual artworks are not securities — they are non-fungible and highly illiquid — and as such evaluating the “performance” of specific works or even certain sectors over time is difficult. Even taking into account the evolution of fractional art shares and art funds as investment vehicles, the lack of transparency around pricing (as well as regulation) can make it difficult for investors to make a satisfactory risk-reward assessment.

Unfortunately, this lack of transparency is part of the risk when investing in alternative assets.

The Takeaway

Investing in art offers some advantages, not least of which is the enjoyment of researching and purchasing individual works that fulfill a personal taste or passion. In addition, art is an alternative investment, meaning that it doesn’t move in tandem with traditional markets. As such, it can offer portfolio diversification.

But like many alternative assets, art can be highly volatile and illiquid. As a whole, although art investment opportunities have expanded into art funds and owning fractional shares of artworks, art as an investment is not transparent or well regulated. That said, for the right investor, this asset class may provide unique opportunities.

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FAQ

What is the best art to invest in?

The best art to invest in is art you know well and has a value you feel confident in. That might be an individual piece by a certain artist, or it might be fractional shares in well-known or even famous works. Whatever route you choose, treat it like any other investment: do the necessary research, and understand the potential risks and rewards.

Will the art you choose increase in value?

As with any type of investment there are no guarantees. Some works of art appreciate steadily over time, some enjoy a sudden rise in value if market trends are favorable, while other art you might invest in could rapidly lose value. This is why it’s essential for any investor interested in art to fully understand how these alternative assets might fit into your portfolio, or not.


Photo credit: iStock/South_agency

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