Top Tips of Investing in Fine Art

PUBLISHED ON Mar 20, 2019

Fine art is an investment asset class that is rarely out of the news. There is a constant stream of announcements of record breaking sales from prestigious auction houses spanning the globe. Investors in art seeking to tap into what are reported as spectacular capital gains in fine art, should familiarize themselves with the pros and cons of this market. Trading in fine art is an enterprise that is complex. It has many unknowns.

The fine arts market is almost impenetrable by risk analysis. There is little transparency in the fine arts market. Unlike with other asset classes the market is for the most part unregulated. The trade in fine art is unpredictable because it depends not just on supply and demand but also on the unmeasurable factor of taste.

Fine art is divided into several categories. These are defined by the media used by the artist. An investor will often specialize in one of these sub-categories for example, painting, sculpture or photographs. Each of these requires specialized knowledge. An investing in art often involves specialization in collecting historical or contemporary art. An investor in fine art will decide what to buy based on knowledge of history of art in a chosen medium. Recognizing quality is also an important skill. In art investment buying the best is a good strategy.

Why invest in fine art?

Investing in art is complicated. It is risky and it does require special knowledge. Why then, invest in fine art? The answer is simple. Fine art does not deliver quarterly dividends like stocks and bonds. Investing in art does deliver intangible daily dividends such as the pleasure of looking at an impressive work of art. Owning fine art is prestigious and self-satisfying across many cultures. When chosen carefully a work of art will provide enjoyment of one sort or another. In the best of situations it will also produce monetary returns on investment.

Fine art is a consumable by the eye. But an artwork is unusual because it is not consumed like other assets such as natural resources. Fine art does not depreciate like real estate. Sometimes its value does go down. This is often because of changes in the market. Decrease in value has nothing to do with the objects itself unless it is discovered to be a forgery. Investing in art and art collecting are the same thing. It is enjoyable for a collector of art to show friends an artwork that he or she has bought. A collector might receive praise for their good taste. He or she might gain a reputation for skill in discovering a new talent. An art collection is a focus for social interaction.

Social interaction goes well beyond the home or office. Art investors take part in social events at galleries, museums, art fairs, and auctions. All these joys are value added aspects of investing in art. Buying art is investing in art. It might be for personal pleasure. It could be simply to decorate a room. It might be to obtain capital gains at some time in the future. Or an art investment can be all three.

How does art investing work?

Investing in art works is like buying anything else that is a luxury. A collector looks around the retail market for a piece that appeals to them. An investor does the same thing. Investors have another criterion in mind when they buy. They will want to think about whether the artwork will appreciate in value.

The art retail market includes everything from garage sales to high-end auction houses. It also includes galleries selling contemporary art. Be sure to determine the reliability of retail sources of fine art. All levels of the retail market in fine art are unique. Only a few investors in art have the patience to scour garage sales and junk stores. Those who do sometimes make great discoveries. These occasionally will deliver fantastic gains.

Novice investors in fine arts are advised to study the subject. This is done by reading, going to galleries and getting advice. Independent advisors or consultants are often used by corporate art collectors in making an art investment. They might be advisors attached to auction houses, museums or commercial galleries. It is important for an art investor to understand the motives of the various types of advisors.

For example, a museum curator may want to point a collector towards a specific artwork. They may expect that in the future it will be donated to their institution. The owner of a commercial gallery will promote the works of art in their own stock. They are motivated to make sales. Be cautious of their promises.

In selling a work of art an investor might seek the advice of an expert. These professionals will know how hot the market is for an artist’s work. They also know the market for historical art and the sub-categories of work in various media. An art investor will be cautious about this advice. Auctioneers, for example, have an interest in quantity as well as quality in their businesses. They make money whether an artwork finds a buyer or not. They profit from both high and low sales prices.

How to evaluate / buy / sell art investments

There are specialists who evaluate fine arts. The best of them provide objective services. These evaluators are recognized by tax authorities and insurance companies. Before buying an artwork, an investor could consult an evaluator. This will prevent overpaying for an art investment.

Always try to avoid overpaying when buying fine art. Don’t get caught up in the thrill of action at an auction. An investor should exercise due diligence. Check available sources for recent prices for similar works of art. This is not like checking stock ticker prices. An investor in fine art is buying something that is unique. Even experts cannot provide precise evaluations. They state the possible value of an artwork as a range.

Expert evaluators use information from auction sales. Subscription art price indexes give this data. Not included in these indexes are the prices of art in the primary market. Data on sales at commercial galleries and direct sales from artist to collector are not in the public domain. Evaluators of works by artists who do not have a record of sales at auction in the secondary market use their own knowledge of dealers’ price lists.

A dealer’s price is not a 100% reliable source. Works in the primary market may be discounted by the seller. A price list will not reveal whether a work was unsold. What a work of art might sell for in an open market between a willing buyer and willing seller is at best an inexact estimate.

Source: Today Trader