When we invest in anything, we are trying to maximize our return thereon investment, given some level of acceptable risk. All financial investments involve a balance between return and risk. Investing in art is not any different. we've to ask: "What is that the expected rate of return, and what are the risks?" Besides these criteria, art investment offers other investment advantages. So let's take a glance at these issues in art investment.
When we invest in anything, we are trying to maximize our return thereon investment, given some level of acceptable risk. All financial investments involve a balance between return and risk. Investing in art is not any different. we've to ask: "What is that the expected rate of return, and what are the risks?" Besides these criteria, art investment offers other investment advantages. So let's take a glance at these issues in art investment.
Rate of Return
Calculating the rate of return on art investment is difficult. the problem lies in devising a performance index that accurately reflects the movement within the prices of art. Since we are concerned with investment, I'm considering only what I call investment-grade art. this is often the art that's offered by the main auction houses like Christie's and Sotheby's -- not the art you would possibly find during a downtown gallery. Admittedly, this criterion isn't precise. There are several indexes created to live the changes in art prices. one of the foremost respected indexes of investment-grade art is that the Mei Moses All-Art Index. The index was developed by two ny University professors and is usually quoted because the most reliable in describing art price fluctuations. This index indicates that art prices have almost matched the performance of stocks, which over some periods, the speed of return on art has beaten the stock exchange. this is able to put the annualized rate of return somewhere on the brink of 6%.
Other estimates for price growth in art haven't been so optimistic. In fact, some estimates place the speed of return near zero. A study directed by Luc Renneboog in the Netherlands, Tilburg University estimates that the speed of growth from 1970 to 1997 to be around 4%. we will speculate that the long-term rate of return for investment-grade art is somewhere between 2% and 6% with 4% probably a reasonably decent estimate counting on the art bundle. In today's economy where certificates of deposit are yielding on the brink of 0%, a forty-five yield on art would seem attractive.
Asset Diversification
It is a fundamental premise of monetary management that asset diversification can reduce the overall risk of a portfolio of assets. Adding new financial assets to any portfolio should serve to scale back risks, especially if the performance of the new asset doesn't correlate directly with other assets within the portfolio. Although price swings of stocks and art are often paralleled, they're not always perfectly in sync. Stock prices usually reflect economic activity whereas art isn't as directly impacted.
Inflation Hedge
Real property can provide a hedge against inflation. Whereas inflation can fret the worth of monetary-based assets like bonds and certificates of deposits. Like land, coins, and gold, art is real estate. Although the availability of art continues to grow, the demand for investment-grade art is growing even faster. Renoir and Picasso have long stopped painting. Periods of hyperinflation, have always seen huge increases within the prices of investment-grade art.
Tax Advantages
As has been noted earlier long-term profits are taxed at lower rates than ordinary income. Plus, a portfolio in art offers the likelihood of other tax advantages if the owner donates the art to qualifying charities, especially museums. within the same vein, art assets can play a big role in a person's estate planning.
Although current reduced tax rates for long-term gains and estate taxes have worked to scale back many of those tax advantages, these tax cuts are scheduled to expire within the next few years. New tax schedules could emerge again favoring the tax advantages of art assets.
The Joy of Collecting
There are other gains which will be derived from art investment -- the thrill of collecting and displaying a collection. One might argue if you're getting to collect art anyway, you would possibly also pursue the collecting seriously with the aim of ultimately making a take advantage of the method. there's a danger of developing the mindset of a collector if you're seeking gain.
Investors make money in the art once they sell to collectors -- not the reverse.
Summary
So why invest in art? Probably the foremost compelling reason is that the reduction of portfolio risk by diversification and as an inflation hedge. Although a 4-6% return on investment surpasses money-based assets, it falls behind stocks and precious metals. However, the price reflects supply and demand. the availability of investment-grade art is diminishing as contemporary artists gravitate to electronic art mediums. Paint on canvas for the present generation of artists is passé, and new electronic sorts of art-making add nothing to the inventory of marketable art. This trend might not be immediately felt on the art market, but could have an incredible effect in twenty or thirty years. And art investment is usually a long-term proposition.
By combining the possible financial gains from investing in art with the emotional pleasure of owning and displaying the art, then art investment can become "profitable."
RL Foster has had extensive experience within the art business. He has worked almost twenty years within the gallery business -- first because of the marketing director of 1 Denver's most successful galleries and later together with his own gallery. For much of that point, he has also worked as a knowledgeable art appraiser and is that the director of the website: InvestingInArt.net. He also advises artists and conducts several workshops a year on the business of art. He has written many articles on art and artists for national publications.
