The market is too volatile? Take a look at art
Author: Koki Mashita | Editor: Nichola Monroe | Updated November 22nd, 2020
Investing into overall markets such as SPY and index funds has been relatively nonvolatile to say the least. However, the pandemic and the election has raised uncertainty and fear among the investors: the building blocks of market volatility. Especially with the United States beginning to show signs of a third wave of COVID-19, it would be wise to diversify your investment portfolio from just stocks. Thus, investing into art is a good way to outperform overall markets and to have less correlation with the stock market.
Art has been one of the oldest investment vehicles for the extremely rich. Christies, a company based in London & New York has been brokering art since 1766. The main attractiveness of investing into art from the financial perspective is the art’s low correlation to developed equities. As seen in the table derived from Citi Private Bank Global Asset Allocation Team, art’s correlation is 0.13 when compared with developed equities
Performance has also been outstanding for the top 100 most important artists in the world. The Artprice 100 allows us to compare it to the S&P 500; the graph represents more volatility but better performance overall. Note that the Artprice Global Index has not performed well. Thus, it suggests to us that it is not wise to invest into smaller artists. Art seems like a great investment, but it is only accessible to the ultra wealthy. Paintings that are estimated to rise in value without much risk costs over 7 figures — it is the same thing as buying a whole company. This may seem doable for small firms and investors, but we also must consider the diversification within the art world. When investing in art, an investor should invest into multiple paintings to mitigate risk; therefore, the actual cost of investing in art is much higher than the cost of one painting. However, new platforms such as
Masterworks allow normal investors to start investing with fractional art shares.
Masterworks is a company founded in 2017 to make investing into blue chip art more accessible. To do so, they buy art from auction houses such as Christies and register it to the SEC. Thus, people are able to buy shares of art: a similar concept to buying shares of companies. From this, people are able to invest into legendary artwork from Banksy, George Condo, and Picasso.
But why now? As like any other investment vehicle, art bought by Masterworks must eventually sell the asset to make a profit. To do so, Masterworks needs wealthy buyers to buy art. One may think that art is doomed because COVID-19 has devastated the economy but according to Business Insider, billionaires who buy seven figure art have gained half a trillion dollars in the pandemic. As understood from basic economics, when people have more money, consumer spending rises. Therefore, billionaires are more likely to buy art. In fact, The Economist claims “There is more money chasing art and antiques” in addition to decline in supply due to the decrease in legendary artists, and the increasing life span of art collectors. As art collectors live longer, the collectors keep their collections off the market for longer. The lack of amazing art and the increase in demand for expensive art makes investing in art a great form of alternative investment.
However, investing in art through platforms such as Masterworks are illiquid. Unlike companies who are valued at billions of dollars, blue chip art is only worth a couple million dollars and platforms such as Masterworks lack individual investors. From my personal experience, investing through Masterworks is deemed to be extremely illiquid and very difficult to track its performance. I am unable to make a return until I find a buyer for my shares on their trading platform or until Masterworks sells the art to a buyer. I bought a piece of art from George Condo a few weeks ago but there are no listings of anyone wanting to buy my shares yet. It is very difficult to invest when you cannot check the art’s performance for a while. Additionally, Masterworks also takes 20% of the profits made and 2% management fee like a hedge fund.
Overall, art seems to be a great type of alternative investment if you are looking to diversify your portfolio. But I do not think investing more than 10% of your portfolio in art is reasonable due to its illiquidity and uncertainty.