The rules are fairly straight forward: be nice, eat right, exercise, brush twice daily, experience art and invest carefully. Right? Be it through retirement accounts, stocks or income properties, most of us have some form of investment as part of our financial plans. If you’re building an art collection, then the lines between collection and investment can become blurred. When you saw large-scale canvases by Kehinde Wiley red-dotted at booths throughout this year’s Armory Show selling for between $250K and $375K you might have thought
“That would look great in my living room, but how smart is it for me to invest $250,000 in new art? Is it even really an investment?”
Good question.
Art As an Asset Class
76% of art buyers are doing so for investment purposes according to Deloitte’s 2014 Art & Finance Report. Art is increasingly being viewed as an asset class alongside more commonly held investments, by not only the economic and art market experts, but collectors at both ends of the spectrum, from those seeking emerging art at $10K to those collecting $2.5 M blue-chip pieces.
This change comes for good reason. The 2016 TEFAF Art Market Report showed that while global art sales fell 7% during 2015 from $68.2B to $63.8B, the art market has still historically performed as successfully, if not more so than more traditional asset classes. According to Andrea Danse, CEO of Athena Art Finance, speaking at the Armory Show talk, ‘How to Optimize the Unpredictable Art Market’, art selling for over $100K achieved an average rate of return between 12% and 15% in 2015.
According to University of Luxembourg researcher, Roman Kräussl, growth in the price of art by the 500 top performing visual artists over ten years from 2004 and 2014 outpaced real estate and gold as growing asset classes.
Essentially, according to Kräussl’s research, anyone who invested in an average performing piece of property, an equivalently priced work by a top performing artist and average performing stocks in the S&P 500, would have seen the most aggressive return from their art purchase. Yes, this is painting with a broad brush, but unintentional cheesy pun aside, the point is that art is undeniably an asset class that has the potential to draw significant returns.
So let’s break down whether it’s really worth it to purchase just for investment’s sake.
One Size Doesn’t Fit All
The short answer is it depends. If you investigated the potential of a specific piece, almost every source will give you a different answer because what’s good for the goose is not good for the gander when it comes to any investment, but particularly so when it comes to art. What you buy is as important as how you maintain it, when you potentially plan to sell it and a litany of other factors when it comes to art. This is not the case with a share of stock. Whether you’re goose, gander or you don’t even get the analogy; all art is not created equally, nor are all collectors. One size doesn’t fit all.
Two materially similar pieces by artists who appear equally lauded today may trend in completely opposite directions over the next fifteen years. In addition, the best performing art at this time is at price points that exclude a significant portion of collectors, at $100K. Contemporary art is the fastest growing section of the global art market, but it’s clear that to see the highest percentage of return at this time, the barrier to entry is fairly steep.
I always suggest collectors buy what they like, investment be damned. Artwork should move you, in the very least. Yes, there are ways to identify artworks that indications show will increase in value, but it’s wisest to stick to art that you enjoy experiencing.
If you’ve decided that you truly love an artwork and want to assess your next acquisition for its investment quality, you can apply some of the same principles used to evaluate traditional investments.
Comparing Traditional Investments to Art
Typical ownership investments include any asset that you take an ownership stake in. We hold these investments with the objective of seeing them appreciate in value in time while we own them. Traditional ownership investments include financial investments such as stocks and mutual funds, businesses, real estate and less commonly collectibles such as art.
According to the S&P 500’s historical reports, the collection of stocks selected to reflect the behaviors of the larger market ecosphere, returns approximately 10% annually. After this figure is adjusted for inflation, the average annual return is closer to 7%.
The health and market position of a company is a good indicator of its potential for generating a return. The studio practice of an artist can be evaluated in the same way. Successful artists run their practices like businesses in that they can continue to elevate the quality of work their studio produces. They safeguard their ability to do so today and in the future. Purchasing art is essentially investing in an artist and investing in a productive artist is investing in their practice.
Investing in an artist’s practice is much like investing in any other business. Many of the same parameters for evaluating a business for investment can be considered when deciding to purchase an artist’s work.
Investments That Engage
Many years ago someone said to me, “the difference between fine art photography and editorial photography lies in that fine art inspires you to question something, whereas editorial photography tells you an answer to a question you didn’t even know they were asking”.
I found this to be a great way to simply explain how the creative appropriation of an image can plant the seeds of a though, a question or a revelation in someone. Conversely, that same image can be used to tell you a predefined message. Considering the latter, I remembered how powerful marketing is and felt hyper self aware that about the potential of a marketer using something like the Mona Lisa to sell me an iPad or an Range Rover (blasphemy!).
Nonetheless, this ability of art to engage us in an unlimited dialogue distinguishes it from other potential investments. Your shares of Alibaba (BABA), Macy’s (M) and Spectra Energy (SE) may have earnings records that promise you returns, but don’t expect them to inspire your day every morning over coffee. While comparing a painting to a share of stock is not a simple comparison to make, for many collectors the decision to diversify their investments through art is an easy one. With careful consideration, both financial and collection goals can be met.
