During the past several years record-setting art sales have repeatedly made headline news for both auctions and private sales. Abigail Esman, a contributor to Forbes magazine, noted during 2012 that “in spite of the sword of Damocles hanging over the West, art in fact sold better in 2011 than at any other time in history with $11.57 billion in total global annual revenue, up $2 billion versus 2010, which already produced the best performance of the decade. This increase was not solely generated by the Chinese market’s 49% growth compared with 2010; it represented overall growth… including European”.
Few of us will be able to purchase a work of art for tens of millions of dollars, so let’s discuss art as an investment for the rest of us.
An Investment of Passion
As I did research for this topic, one consideration was brought up by virtually every source and expert: art is first and foremost an investment of passion that may also be an investment for monetary gain. More than a few experts bluntly state that if you do not enjoy the art you purchase, you will not enjoy it as a financial investment. Looking at the art in our home, I can certainly appreciate that statement as I look at the first piece of art I ever bought, and love it as much today as the day I bought it. I know it has appreciated in value considerably, but it gives me a great sense of peace and pleasure to take in the sweeping lines and magnificent colors. To me, that is a priceless investment.
Looking at art as strictly a practical investment, however, also shows a rather rosy picture.
Art Has Stability in Good Times and Bad
Fine art is one of the few types of investment that rarely goes down in value. Some have argued that art is a risky investment, but statistics indicate otherwise. The overall market for fine art grows every year. The return rates for some pieces of fine art can be quite impressive with double digit rates not uncommon. One of the Plum Majestic sculptors of Western art has averaged more than a 10% increase in value each year for several decades. That beats all but a handful of stocks in the entire world!
The “Art Market Blog” notes that “the art market is a relatively insulated market which means that outside influences such as the economy, the share market, interest rates etc., tend to have very little, if any, impact on the value of artworks. This also means that the art market tends to be very stable compared to other investment markets.
“Secondly, art is an asset backed investment which means that you are investing in something tangible as opposed to the stock market where you could potentially end up with nothing. An artwork will always have a value and if chosen correctly should not go down in value, with a worst case scenario of the artwork holding its value for a period of time.
“Thirdly, the art market allows you to invest in something that is not only a good investment but also provides long lasting enjoyment, a factor that should be seriously considered when looking at investments.”
Industry experts agree that investing in contemporary art definitely gives good returns in both the medium and long term and can even provide high rates of return in the short term if the choice is well done. New artists who are ascending the contemporary art world and investing in media other than painting and sculpture can lead to high returns in the short or medium term.
Another reason to invest in art is that many countries offer more tax advantages to an art investor than those who invest in the stock market or real estate. Works of art may not be subject to taxation and in many cases a business can deduct the purchasing cost of art.
Owning Art is a Treasure
Katherine Tyrrel, who writes “Making your Mark, describes several reasons why people in Asia and other growing economies invest in art:
Those who live in more volatile economies tend to invest more in ‘treasure’ assets – it’s seen as more secure;
The most significant motivation for holding treasure assets was enjoyment– people acquire the treasure because they derive pleasure from it;
Owning treasure can be social – especially if you get to share it and show it off to people; and
In those countries which have more people who have acquired their wealth relatively recently – such as India and China – people are more likely to want to demonstrate their status through the treasure they own.
Another point of view is that fine art is an enjoyable way of diversifying a portfolio. There is more enjoyment in displaying art in your home or office than in displaying stock certificates.
Fine art is frequently seen as an investment favored by older people. Research has shown people’s attachment to their treasure tends to grow as they get older. It is an investment people tend to hold on to. Simply having owned a piece of art for a long time, typically means the owner is not willing to sell it at the same price for which they would buy it.
Of course, for the status conscious, showing a new investment to people provides a signal as to your relative status, i.e. you can afford to buy an expensive work of art.
Two professors at New York University’s Stern School of Business, Micheal Moses and Jaingping Mei, have been compiling data that allows them to track the long-term performance of fine art. The result is the Mei Moses Fine Art Index.
An article in “Slate Magazine” describes the index as focusing on mature artists whose works command significant prices at auction. “They take the original sales price and then subtract it from the most recent sales price at Christie’s and Sotheby’s in New York and calculate an annual return for a single painting. So, for example, a J.M.W. Turner view of Venice sold at auction at Christie’s in London on May 29, 1897, for $35,000 and then sold at Christies in New York last April (2005) for $35.8 million—which yields about a 6 percent annual return for 109 years. Which is pretty darn good.”
As their most recent update shows, over the last 50 years, stocks (as represented by the S&P 500) returned 10.9 % annually, while the art index returned 10.5 % per annum. And in the five years between 2001 and 2005, art trounced stocks. But not all art performs equally. In recent years, old masters haven’t done so well, while American art before 1950 has been soaring—up 25.2 percent in 2005. You can’t simply push a button and sell a Picasso tomorrow. And while you might assume that the fortunes of the art market are closely tied to the fortunes of the stock market, Moses found that fine art actually has a very low correlation with stocks and a negative correlation with bonds. “In some sense, it’s a good portfolio diversifier,” says Moses.
Impact on the Economy
From a societal angle there are even more reasons to invest in art. According to the UNM Bureau of Business and Economic Research, “Arts and cultural industries generate $1.2 billion in revenues, $413 million in wages, and 19,500 jobs, totaling 6% of all employment in the County”(Bernalillo county, NM). This report goes on to say, “Arts and culture, once considered luxuries that follow prosperity, are now understood to be conditions of prosperity. Yes, art and culture are big business and among the fastest growing sectors of the economy, but their economic importance extends far beyond the value of their receipts. Today, a vibrant art and cultural sector is crucial to attracting and retaining a talented labor force and creating an environment conducive to innovation. In this sense, the rich and distinctive cultures of cities such as San Francisco, Seattle, Austin, and Boulder are not so much evidence of these cities’ economic prosperity as they are factors that give rise to it.”
And finally, from an artist’s point of view, artists need to eat too! (get over the starving artist myth! No artist goes into the arts wanting to starve!).
Just how many reasons are needed to prove art is a good investment?
My suggestion – go out and buy a piece of art – and enjoy it!
Warren Vollmar, CEO