Major art fairs are taking place across the world starting from Istanbul to Chicago and Shanghai. Art collectors and enthusiasts are questioning whether to buy works of fine art as investment. With appreciation in some areas of the art market, there is growing interest from clients and investors about including art in their investment portfolios. We have seen a huge rise in art sales and over the coming years, it is only going to increase. There could be a sizeable jump in the next two years.
If you are considering an art purchase, it is important for you to think of art as a part of the total portfolio and consider these aspects before taking the plunge.
1. Do not get caught up in the hype
Whenever we see an asset class performing well, we want a bite of the action. But it does not matter if it is a stock, real estate, or even a piece of art. The recent art appreciation has led to great excitement but in reality, only a few artists will be able to generate the big returns. Do not fall into the potentially hazardous behavior patterns in the hope to ride the wave when an asset class performs well. Putting your money in the underappreciated art piece or buying from the soon-to-be-discovered artist hoping that it becomes the next big thing may prove to be wrong. Whenever you consider an art investment, step back and take a good view of the future cash flow, and investment assets.
2. Consider art like venture capital investing
Just the way each start-up is unique so is the work of art. Few have a track record of success but there are many which are prone to the market whims. The individual interpretation, as well as the unique viewpoints on the artwork, will drive the passionate collectors. This explains why it is hard to think of art as an asset class. It has no cash flow, no earnings, or a balance sheet that can help you determine its true value. If you want to know the fair market value of a piece of art, you need to work with a reputable art advisor and look for sale prices of comparable works. You can also try to learn about the life and times of an artist. It will provide meaning and context for the investment piece.
3. Remove the belief that art sales will translate to resale value
There is a secondary market for art but it is limited beyond works from the top artists. Hence, before you calculate any windfall, keep in mind that IRS considers art as a collectible and you will have to pay a high rate of tax on the gains. Add this to the expenses of acquiring art, fine art storage, owning and selling it. You may net only 55 percent of the sale price. Do not think that you will be able to make a huge amount through the resale. If you invest in art, consider working with an art advisor to understand the financial and non-financial benefits.
4. Consider art as a collection in itself
Do not think of your collection as a sum of its parts but consider it as a collection in itself. The IRS will consider art as a part of the portfolio so you need to plan your estate accordingly. If you intend to sell art before you die, consider the tax implications and if you want to gift it to your children, consider the process and its implications. When thinking of art as an investment, you must consider your finances and take a good look at the current portfolio. Art is an investment but there are several other factors that may come into play. Each asset may serve a purpose your portfolio but it is important to determine the long-term objectives before making an investment.
All of us want to benefit from an investment and the art market is no different. However, it is not meant for everyone. It is important to think about the purpose art will serve in your life and in your portfolio. Do not make a decision based on how others are investing or making money through art. It may or may not work for you. Consider your current financial situation, understand your goals and then look at pieces of art. It is a lot more than choosing artwork for your living room and you do not want to go wrong here. If this is the first time you are investing in art and have no idea how it works, you can seek the help of a professional art advisor to make the process easy and convenient for you.