Investing In  Art
Pablo Picasso
Pablo Picasso Investment Profile

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What is an art Investor?

Why Invest In Art ?


When we invest in anything, we are attempting to maximize our return on that investment, given some level of acceptable risk. All financial investments involve a balance between return and risk. Investing in art is no different. We have to ask: "What is the expected rate of return, and what are the risks" Besides these criteria, art investment offers other investment advantages. So let's take a look at these issues in art investment.

Rate of Return

Calculating a rate of return on art investment is difficult. The difficulty lies in devising a performance index that accurately reflects the movement in the prices of art. Since we are concerned with investment, I am considering only what I call investment grade art. This is the art that is offered by the major auction houses such as Christie's and Sotheby's -- not the art you might find in a downtown gallery. Admittedly, this criteria is not precise. There have been several indexes created to measure the changes in art prices. One the most respected indexes of investment grade art is the Mei Moses All-Art Index. The index was developed by two New York University professors, and is often quoted as the most reliable in describing art price fluctuations. This index indicates that art prices have almost matched the performance of stocks, and that over some periods the rate of return on art has beaten the stock market. This would put the annualized rate of return somewhere close to 6%. Other estimates for price growth in art have not been so optimistic. In fact, some estimates place the rate of return near zero. A study directed by Luc Renneboog at Netherlands, Tilburg University estimates the rate of growth from 1970 to 1997 to be around 4%. We can speculate that the long-term rate of return for investment grade art is somewhere between 2% and 6% with 4% probably a fairly decent estimate depending on the art bundle. In today's economy where certificates of deposit are yielding close to 0%, a four percent yield on fine art would appear attractive.

Asset Diversification

Kerze by Gerhard RichterIt is a fundamental premise of financial management that asset diversification can reduce overall risk of a portfolio of assets. Adding new financial assets to any portfolio should serve to reduce risks, especially if the performance of the new asset does not correlate directly with other assets in the portfolio. Although price swings of stocks and fine art are often paralleled, they are not always perfectly in sync. Stock prices usually reflect economic activity whereas fine art is not as directly impacted.

Most investors seek to balance assets that yield immediate income with others that provide long-term gain. Art is an investment for the long term. Thus, profits from an art investment are taxed at the long-term capital gains rates, which are now and historically much lower than ordinary income.

Inflation Hedge

Real property can provide a hedge against inflation. Whereas inflation can eat into the value of monetary based assets such as bonds and certificates of deposits. Like real estate, coins, and gold, art is real property. Although the supply of art continues to grow, the demand for investment grade art is growing even faster. Renoir and Picasso have long stopped painting. Periods of hyper inflation, have always seen huge increases in the prices of investment grade fine art.

Continued


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