When you ask to a financial advisor to provide a list of investment options, you should expect to see the usual suspects: bond, stocks, mutual funds and ETFs.
What about different investment options? Have you ever thought about spending money on the art market?
The global art market is booming: to make an example, last year the Leonardo Da Vinci’s Salvator Mundi was sold for 450 million $.
The returns of fine art have been significantly overestimated, and the risk, underestimated: according to Stanford’s researchers the index of fine art sales shows an average annual rate of return of 10% whereas in the past 40 years it comes out to be closer to 6%.
The art index mentioned before uses the prices of famous and very esteemed artists to assign a value to the other ones not belonging to the “art hall of fame”. This is how the art market works: imagine you have purchased two paintings for $10.000 each in 1980, one of Damien Hirst and the other one of John Smith. 20 years later, Hirst’s career took off conversely Smith’s one did not and you managed to sell Hirst’s painting for $20.000 while Smith’s painting remained unsold. According to that calculation, each painting is worth $20,000. The index therefore would report the return on the investor’s original $20,000 at 100% $40,000, although in reality you realized only a 50% return, as you own paintings worth $30,000, not $40,000.
If Roy’s painting were an average painting, using it to assign a value to paintings like Tony’s wouldn’t be a bad way to estimate returns however, the paintings that sell are far from average.
When we compared the investment returns and risk of all the styles of art to a portfolio of pure stocks, we found that art investments would not substantially improve the risk/return profile of a portfolio diversified among traditional asset classes, such as stocks and bonds. Melanie Gerlis, the author of Art as an Investment?, says that, after having combined all the data on the broad market, on average the return on investment-grade art is around 4pc. This estimation is considerably less than the return rate on gold, wine and both public and private equity.
Furthermore, it is reasonable to expect the volatility of the price due to changes in the economic environment or because some particular works or artists come in or out of favour. By purchasing works of art, what you get is an investment which is unregulated, illiquid, with high charges, that produces no income and with potentially volatile performance and all these characteristics do not appeal to most investors.
No matter how you slice it: art is not a smart and profitable investment for the average person and even for high-net-worth people wold be better not to have more than a 10% allocation to art in their portfolios.
Works of art are primarily aesthetic investments, not financial ones and buy paintings is not the wisest way to make a quick buck. Before purchasing one of them just ask yourself: does hanging my own financial future on a canvas make sense?