Everywhere across the globe holds major art fairs and from Chicago to Istanbul, art enthusiasts, collectors and sophisticated investors alike are questioning whether to put money into works of fine art as tangible assets. As significant appreciation emerges in some corners of the art market, we see a growing interest from clients about incorporating art into an investment portfolio. As many as seventy five per cent of art collectors and buyers are purchasing art for collecting purposes from the larger pieces down to Equestrian painting. This is a sizeable jump from the fifty three per cent just two years ago. Artworks sold at auction jumped more than twenty five per cent in sales and that’s four times more than just a decade ago.
When you consider buying into art, you should think of it as part of your total portfolio in the same way a second home, private business or real estate investment, but not an asset that adds diversification in the traditional way. There are four factors that should be considered before you invest in art:
- Avoid getting mixed up in the excitement. When any asset performs well, more investors want a piece of the action. It doesn’t matter if it is a stock, home or work of art. Recent art appreciation has triggered a lot of excitement but only a handful of artists and artistic periods will actually generate those big returns. Buying that soon to be discovered artist or that underappreciated art form about to become the next big thing often proves to be the exception, not the rule.
- Think of art in the same way as investing in venture-capital. Just as each start-up is unique, so too are the works of art. Some have a track record of great success, but can be prone to market changes. Unlike start-ups art has no balance sheet, cash flow or earnings to help determine its true value.
- Art doesn’t translate into resale value. Before you calculate any windfall, remember that the tax man does consider art as a collectible, meaning that the tax rates on gains is up to twenty eight per cent. Add that to expenses that you incur when acquiring, owning and selling art, you may only keep just over half of the sale price. You should view any financial gain as an additional benefit rather than an expected outcome. If you view any financial fain as an added bonus rather than an income that’s expected, you won’t be disappointed.
- Value your collection as more than the sum of its parts. This adds a layer of complexity to appraising a collection and raises important planning considerations for wealth transfer or philanthropic giving. Art is an important part of a portfolio when your estate is valued after death. Make sure you update your estate plan accordingly and work out whether you intend to sell up before you die or gift it to your children or museum.