Investing in art has its pros and cons, and is not for anyone. Compared to putting your money into an index fund, investing in art requires more research (unless you want to leave it up to chance), and keeping physical art safe and in pristine condition is also more labourous than simply having your money in stocks, funds or similar.
Old or new?
The market for visual art, such as paintings and sculptures, can broadly be divided into two categories:
- Works of art that are well-known and have a fairly long history. These art works tend to attract more conservative investors who want to see a track record of price increases and need to be assured that market´s interest in this specific work isn´t a short-lived fad.
- Contemporary works. This category tend to attract investors who want to be the one that ”discovers” a talented artist early one. Typically, investors going for this category are less risk-adverse. Also, some build large and hetergoenous portfolios of comparatively inexpensive art works as a way of spreading risk.
Both categories can be described as markets with oligopolistic tendencies, since there is such as limited number of buyers and sellers.
The price of an artwork can be influneced by several factors. One of them is social value, where the buyer is willing to pay to purchase social status. The historical price of the work, and the buyer´s expectation of a future price, can also be very important, especially for buyers who invest in art as a commodity.
When art historians and art professors talk about the value of a work, they tend to focus on its artistic value and its historical value for contemporary and future generations.
Financial institutions investing in art
One of the factors behind the sky-rocketing prices paid for certain works of art is the considerable return rates on investments in art since the 1980s. It thus creates a self-perpetuing bubble. Many very large financial institutions – such as banks and insurance companies – have entered the art world and reaped considerable profits, which has encouraged them to continue investing in art, thus pushing even more money into the art market.
When art is sold at public or semi-public auctions, it creates a market transparency that encourages certain types of investors. Even when the buyer elects to remain anonymous, the price is often made public. Price data bases can thus be compiled and analyzed, just as for the stock markets. Some of today´s most comprehensive art price data bases contain prices going back all they way to the 17th century.
In many countries, art is treated favorably by the tax system. You might for instance find yourself in a situation where you would be paying large amounts of property tax each year on a $50 million piece of real estate but nothing at all on a $50 million piece of art.
Art investments are sometimes employed as a way of hiding assets, as art can – in some aspects – be considered similar to bearer bonds or fine jewellery. It is a physical object that you can stash away, as opposed to investments that exists in databases and public ledgers.
Both the FBI and Interpol has voiced concern that the high amount of secrecy and discretion within the art buying community can make it appealing to money launderers and similar.
Don´t forget the insurance costs
Compared to assets such as stocks or bonds, expensive art is typically something that comes with insurance costs. In this sense, art is more similar to owning real estate, as there is a need – or wish – to keep it insured against fire, water damage, criminals, etc.