Alternative Assets: A Quick Guide to Investing in Art
Since the coronavirus pandemic, the stock market has been incredibly volatile. It’s like every government security mandate sends shockwaves through the entire market. Due to this increased volatility, many investors are turning back to alternative assets. Specifically, investors are taking a closer look at how to invest in art.
As an alternative asset, art has come a long way. For years, investing in art was really only available to high net worth individuals. It’s something you’ve only done after you’ve already invested millions in stocks and real estate. Nowadays, investing in art is much more accessible. Let’s take a closer look.
Why do people invest in art?
Art is an alternate asset. Most investors primarily use traditional assets like stocks, bonds, and cash alternatives. Alternative assets, on the other hand, are other objects that can increase in value over time. Some examples of alternative assets are commodities, precious metals, diamonds, watches, classic cars and works of art. Alternative asset markets are generally a bit less defined compared to equities.
Recently, investment in art has undergone a major transition. This transition is mainly due to the rise of NFTs. NFT stands for non-fungible token. These are digital tokens that can represent almost anything. Most commonly, NFTs are used to represent works of art. NFTs have completely changed the world of digital art. Indeed, NFTs are based on blockchain technology. Blockchain technology makes it almost impossible to replicate an NFT.
That said, let’s take a look at the benefits you can expect when investing in art.
Benefits of investing
- Diversification. Art is a great way to diversify stocks, bonds and real estate. In addition. government regulations and Federal Reserve meetings don’t really have an impact on art prices. This means that rising interest rates will not cause your investment to fall.
- It can offer higher returns than you expected. Masterworks estimates that the annual appreciation of works of art has been 13.6% since 1995. On the other hand, the historical average return of the S&P 500 is around 10%. Obviously, your returns can vary significantly if you invest in individual works of art.
- You own a piece of history. When you buy an original Picasso or Van Gogh, you are buying a piece of culture. In many ways, it’s far more attractive than owning a stock portfolio. Also, high-end artwork is actually quite stable in terms of price. Even the biggest companies in the world could eventually go bankrupt. However, it’s hard to imagine a scenario where people suddenly stop seeing a famous work of art as valuable.
- Owning works of art is quite cheap. Works of art are expensive to buy but cheap to own. You will likely have to pay to transport and hang your artwork. After that, there are not many other fees. Compare that to an asset like real estate, where owning it comes with dozens of fees (taxes, insurance, HOA fees, etc.). Even stocks can be expensive, as most financial advisors will also charge a fee to manage your portfolio.
- It is usually exposed. No one is framing their Apple shares and putting them back in the lane. Artwork, on the other hand, is meant to be enjoyed.
Disadvantages of investing
- It’s incredibly expensive. For years, a work of art would cost you at least a few thousand dollars. More expensive parts could quickly cost you hundreds of thousands. Although that’s starting to change slightly, investing in art is still generally a rich people’s game.
- The fine arts are very illiquid. Outside of NFT, fine art is one of the most illiquid investments. It is usually a very long process to buy and sell an artwork. If you need to raise money fast, don’t count on selling an artwork.
- Long term horizon. Again, excluding NFTs, art investments generally have a very long time horizon. This means that it can take years for works of art to appreciate in value. In fact, many investors buy works of art with the intention of leaving them to their children.
- All types of art investment are quite risky. A traditional work of art can be safe in terms of price. However, you run the risk of it being damaged or stolen. On the other hand, there is no big risk that your NFT will be damaged or stolen. However, it is possible that the project will lose popularity. This could theoretically reduce the value of your NFT to $0.
Types of art investment
There are three main ways to invest in art. The first is to buy original parts on their own. To do this, you will usually need to work with a professional who can help you navigate the market. This process requires finding, validating and negotiating a work of art. There are some markets, such as Singularityit can make this process easier.
Another way to invest in art is through crowdfunding sites. Two examples of art crowdfunding sites are masterpieces and Yieldstreet. These sites allow you to invest in works of art without buying a work. For example, Masterworks has a portfolio of artwork. All of their pieces have a history of value appreciation. Masterworks secures each coin and allows you to buy âsharesâ of it.
The last way to invest in art is through NFTs. NFTs are still very new and many investors consider investing in NFTs risky. Additionally, most NFT prices are extremely volatile. This can lead to extreme profits or losses in a short time. If buying an NFT seems risky, you can also consider investing in stocks that will benefit from the popularity of NFTs.
Investing in art for beginners
As with any investment, the first place to start when investing in art is your financial goals. Before moving forward, make sure that investing in art matches your goals. If you are looking to diversify your portfolio by owning a unique asset, investing in art is a great idea. If you’re looking for an inexpensive way to earn a safe return, investing in art is probably not for you.
Once you’ve decided to invest in art, the first step is to decide how you want to do it. Here are two questions to ask that can help you get started:
- Do you have a favorite artist? If you do, researching their most famous pieces is a good start.
- Are you only interested in financial gain? If so, I would recommend using a crowdfunding platform. This way, you don’t have to go through the whole sales process. You also don’t have to worry about being responsible for the artwork.
Even though it’s still very new, I would also recommend doing some research on NFTs. Indeed, NFT investing solves two major problems related to owning works of art. First, NFTs are much easier to buy and sell than traditional works of art. Second, NFTs are known to increase in value much faster than traditional works of art.
Ultimately, there is no right answer to investing in art. It all depends on what you are looking for as an investor!
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A graduate of the University of Miami, Teddy studied marketing and finance while playing four years on the football team. He has always had a passion for business and has used his experience from a few personal projects to become one of the top rated business writers on Fiverr.com. When he’s not pounding words on paper, you can find him pounding notes on the piano or traveling to a random location.