Collecting fine art used to be a luxury reserved for the rich and well connected. Today, however, collecting art is an investment strategy that, with a little interest and research, can prove to be both enjoyable and lucrative. Not long ago, an article in Forbes reported that, over a number of different time periods, art outperformed the S&P 500. Even in the months following September 11th, amid recession and war, art auction houses saw new sales records set for more than thirty artists. A study by New York University, which examined twenty seven recessions and four wars, concluded that art’s value tends to hold up well during periods of economic difficulty and that art indices always outperform major stock indices during times of war.
The paradox of investing in art is that its value is intangible, yet it is also a physical object subject to wear and tear, traded like oil or currency futures, and priced according to the dictates of fashion. While certain objective standards affect prices, experienced investors understand that these have little or nothing to do with artistic merit.
The art market has ruined many more investors than it has enriched; perhaps people who paid too much for “brand-name” art in the mistaken belief that it was a safe haven. During the asset inflation of the 1980s, Japanese buyers spent more than USD8.7 billion on art (”Art Bought during Boom Leaves Japan after Crash,” New York Times, August 15, 1999).
– Over the last thirty years the art market has shared characteristics with luxury goods, commodities and property markets. But art has a low correlation with most financial assets, thereby providing good diversification potential.
– Prices tend to rise higher towards the end of an economic cycle, when growth and inflation are above trend.
– Three quarters of buyers consider themselves collectors and less than five per cent investors, with the rest in between. This provides the art market with its stability during economic downturns, inflation and even war, since art is regarded as a store of financial and sentimental value.
– Art can also provide high returns when more investors are willing to buy the dwindling supply available, helped by fewer investment opportunities elsewhere.
– At the June 2006 Post War and Contemporary art auctions in London, the average annual returns for 44 lots sold (bought between the 1970s and early 21st century) was 13.14 per cent, including transaction costs. During the last eighteen months, the Post War and Contemporary art market has risen over 100 per cent.
– The risks art investors should inform themselves about include and are not restricted to: provenance, the fact that the market suffers from uneven supply, long holding periods, heterogeneity, lack of transparency, high transaction costs, illiquidity etc. .
– Since art does not necessarily pay interest, dividends or rent (note, increasingly collectors, galleries and museums are renting their art), primarily returns rely on capital gains only. Nevertheless, some institutions, such as Barclays Capital, suggest allocation up to 10 per cent of a portfolio in art over the next 10 to 20 years.
Article borrowed from http://alternativealternatives.wordpress.com/
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