An alternative investment refers to investment in assets other than traditionally invested in, like bonds, stocks, and cash. An alternative investment is a broad term and it includes various kinds of tangible assets like wine, coins, stamps, and even art. Artworks have made headlines when they are sold for billions in the auction. One must ask why people spend so much money on these paintings, furniture, and other antiques. Are there any financial gains attached to it or is it simply for pleasure?
Well, it is a mix of both. Art and collectibles though have a low intrinsic value they still have demand among its enthusiasts. This is what makes the market of art and collectibles tricky to invest in. Some of them generate huge returns while some lose their value over time. In this article, we will look at how artwork and collectibles can be seen as an alternative investment. We’ll start by understanding the value of art in an economic sense; then look at art as an investment, and what are its advantages and disadvantages; finally the things to keep in mind before investing in Art and the collectible market.
The economics of art and collectibles:
The first important distinction to understand is between antiques and collectibles. It is a subjective issue, but most dealers believe that antiques are crafted and are at least 100 years old, whereas collectibles are newer (it can be even rare comic books, premium baseball cards, coins, stamps, etc.). The market of antiques is stable whereas the markets of collectibles are volatile. What gives these artworks and collectibles its value?
Artworks or collectibles have a low intrinsic value, i.e. there materials like canvas, paints do not cost a lot. However, Artworks have emotional values attached to it. Therefore, the uniqueness of art work contributes to its value.
For collectibles, typically is said to gain its value in the 30 years cycle. It can be a toy or a card which was popular at a time and after a while became quite rare. People tend to collect these collectibles due to their nostalgia when they want to connect to their pasts. This does not mean that if we speculate from the goods available today, which of these will be a collectible 30 years down the lane, we’ll be very successful. Mass production to meet demands has made it pretty difficult to find a commodity that might become rare in the future. The value of a collectible also depends upon its popularity now, and in the future. Therefore returns on a collectible cannot be so easily predicted (the reason that makes them a speculative market).
The typical economic factors that affect the prices of artworks are:
- Very limited supply which gives it a higher value, like any other luxury goods
- The uniqueness of art leads to higher prices, this effect comes from the demand side
- Difficult to enter into the competition, there is a clear interdependency upon the few firms, dealers, and art funds. Three big auction houses- Christie’s, Sotheby, Philips are considered to be the price makers.
Art as an alternative investment:
There has been a constant debate about whether art should be seen as an investment alongside traditional assets. Artists like Maria Bell Slater think that art should be about enjoyment rather than about selling. While economists and banking institutions stress the link between art and investment. The values of traditional assets like stocks, bonds, and cash are easy to determine. Just like the traditional assets artwork is grouped based on the period it is made. Traditional assets are homogeneous so they all have the same price, whereas art is a heterogeneous market.
When it comes to asset planning, the investors are concerned with how well an asset can hedge them against inflation. Since art is volatile in value it is necessary to invest for a long time. However, it is advised by many portfolio managers that artwork and collectibles as an investment should not make up more than 5-7% of your portfolio. India has been seen as a booming market for contemporary art, and has shown price appreciation since the 2000s’.
Disadvantages of investing in Artwork and collectibles:
- Mark-ups- Usually the dealers ask for a high markup to make profits. The rarer the art is the more difficult it is to negotiate with him. So you may have to spend a lot without any surety of returns.
- Maintenance- A collectible does not generate income while you hold it. It can take a lot of maintenance, for example, if you collect expensive wines you might need a cellar with the right temperature. Added costs can be like insurance, paying restorers, etc. You also have to take care of wear and tears as it reduces the value of a collectible. For example- the comic Amazing Spider-man had become a premium collection comic. Its prices rose to $6000, therefore if you own a comic in the original condition it’s highly valuable. But, if it is 30-40% used or damaged it loses its value.
- Counterfeiting- If you have not well researched or don’t have a lot of knowledge about art. Then there are chances that forgeries can happen. You would be spending quite a lot on a fake piece.
- Low returns- on average they have a lower return than the stock market index fund. Estimated returns are only about 5-10%.
- Less liquidity- Once you invest in artwork or antiques you can’t sell it easily, because of a limited number of buyers.
Reasons to invest in artwork and collectibles
- Art as an inflation hedge- According to Philip Abdini “it is safer than shares it’s always there and there will be a value for it”. This theory holds because in situations where the economy and stock market takes a downturn. People invest in artworks and collectibles as they act as a hedge against inflation.
- Diversification of portfolio- it gives investors an option to allocate their funds. This is especially beneficial for those who are interested in it. It decreases portfolio risk because of its low or negative correlation with other international equity.
- Investing in art can also have tax benefits
Now that we have looked at some of the advantages and disadvantages of investing in artworks collectibles, let’s look at some of the things investors should keep in mind before investing in it.
- Buy from a recognized dealer- to avoid being sold a fake piece it is always better to check about your dealer. There are many indexes for artworks and antiques like the antiques furniture price index, which gives you the right value for the artwork. Investors must ensure the dealer is from a top antique trade association.
- Buy what you are interested in- this helps the investors to be well researched about what they want to buy. If you are interested in toys you can collect them, vintage video games, etc. Researching and enjoying the artwork you buy is important because you will hold it for a long time.
- Art Indices- World All Art Index, Mei Moses Family of Fine Art Index, etc., track the prices of individual works sold at auction more than once, for a true ‘apples-to-apples’ comparison over some time. An investor must go over them.
The pleasure of owning artwork and collectibles have their rewards. Investing in them in a different matter altogether. Investing in art and collectibles has its share of uncertainties. That’s why it doesn’t hold a significant portion in the investors’ portfolio. However, for those who have a genuine interest in them it pays off, they also look at its emotional value. It is also a good way of diversifying portfolios and if you have invested correctly the artwork can be worth billions of dollars. The investor has to carefully balance between his interests and his finances while making a decision.