Is Fine Art a Good Investment?
Before you add art to your portfolio it pays to ask one question: is fine art a good investment? Yes, if you’re realistic. Here’s what you need to know about investing in fine art.
For some savvy investors, fine art is more than just something beautiful to admire in a museum—it’s a valuable asset class.
This is especially true of a new generation of Millennial art investors, who are the keenest art investors of 2020. They make up 17% of investors spending $1 million or more on a piece of art, and they’re more likely than any generation to view art as a financial asset and part of a comprehensive wealth-building strategy.
But is fine art a good investment? Here’s what new investors need to know.
What is Fine Art?
First, it helps to understand what fine art is—or at least, a general idea of what qualifies for the term.
There’s a fair amount of disagreement about the exact definition of fine art. By one definition, fine art is art created solely for aesthetic or intellectual value rather than a practical purpose, which includes creative expression that may not necessarily be beautiful. By another definition, fine art is the application of creativity and artistic skill to create something for aesthetic reasons.
Keep in mind that this gets slippery when you recall that art is often created on commission—historically, artists created work for wealthy patrons, while these days, a gallery pays to commission a show from an artist in their stable and then sinks considerable resources into promoting it so that they can make sales. The Sistine Chapel ceiling was created on commission, and few people would argue that it isn’t fine art.
Also, keep in mind that the word ‘fine’ does not inherently refer to the quality of the art. It refers to the purity of the discipline, such as painting, drawing, sculpture, and so on. In the Middle Ages, fine art was split into seven categories that had nothing to do with making things for people to look at (like grammar and rhetoric). In the 20th century, fine art was split into eight accepted categories:
As you can see, “fine art” is often a question of who’s asking.
What Makes Art ‘Fine’?
So, what makes art ‘fine’?
We see this distinction crop up the most in the visual arts world, in part because visual artists can use it to drive value and reputation attached to their work. For this reason, many professional artists classify themselves as fine artists (such as a professional painter) to differentiate themselves from commercial artists (such as a professional graphic artist at a marketing firm).
Even so, artists have to sell their work in order to make money, so you can make the argument that all art is commercial.
What Makes Art Expensive?
It’s also worth asking the pragmatic question: what makes art expensive? After all, a lot of art slapped with the fine art label is impressively expensive.
The short answer is that most art isn’t expensive.
The slightly longer answer is that most art isn’t expensive, but some art is, and it drives prices across the market.
The global art market is basically a giant consensus machine, but it’s also a surprisingly small and insular world consisting of heavily personal connections—between a gallerist and artist or gallerist and buyer. The goal of this machine for the working professional artist is ultimately to sell art. The problem is that regardless of quality, demand for art isn’t evenly distributed among living artists. Instead, buyers go after a small number of in-demand artists, and that drives prices up.
They make those decisions based on quality signals—from the consensus machine. It could be an artist exhibition in a major museum, or what a curator has to say about an artist, or if influential collectors are interested in the work.
Fine Art as an Asset Class
This brings us to fine art as an asset class.
In technical terms, fine art is a collectible asset. In investing, a collectible is an item that is worth more than it originally sold for due to its rarity, popularity, or both. That’s important for fine art investors, since you only earn money on fine art by selling it once it appreciates. And because fine art has a low stock market correlation, it may appreciate regardless of the economy.
Here’s the tricky part: fine art is unlike any other asset class.
Why Art is Unlike Any Other Asset Class
Remember, the art market is not the stock market. It’s both a global consensus machine and a small world of interpersonal connections, which means the art market is a unique ecosystem.
Take selling art, for example. Like other alternative investments, fine art is largely illiquid. There are practical reasons for this. Galleries are usually reluctant to sell a piece they’ve already sold once—after all, if the artist is in their stable, they make money by commissioning shows and selling the art at a profit, so they can earn more money on new work by the same artist. Top-notch auction houses know that fine art is most liquid at the highest rung (blue-chip art) and thus prefer proven names, so up-and-coming and out of favor artists are ignored. The only way to sell is with an expert understanding, relationships with the sellers, and a favorable hand.
Also, keep in mind that market-moving information works very differently in fine art than in stocks. In the stock market, it’s illegal to use market-moving information for profit. In the art world, it’s not only legal but accepted—like a gallerist letting a major client know that an artist will have a major museum show in a few years so the buyer knows to snatch up work before it appreciates.
The key here is appreciation, and art appreciates based on dark matter factors (unseen but not unfelt). The two big ones are museum accessions (black holes into which masterpieces vanish never to hit the market again) and philanthropic giving.
Is Fine Art a Good Investment?
Fine art can be a fine investment—as long as you’re realistic.
First, you have to know the limits of fine art: it’s complex, it’s largely illiquid, and you need a stable of expert partners to make good investments. You also need to know where to participate. As a rule, fine art is largely illiquid except at the level of blue-chip art (high-value art expected to hold steady or increase in value regardless of the economy, usually by auction heavyweights on the scale of Basquiat and Picasso). For ordinary investors, that usually means a crowdfunded model to art investing rather than buying yourself—that way, you can take advantage of the blue-chip market.
However, even if you take a crowdfunded approach, you need experts in your corner. Otherwise, the art available on the platform may not deliver solid gains, and even if it does, you need the art world connections to resell the art and realize those gains.
Finally, keep in mind that no investment is guaranteed.
Fine Art Investing Made Accessible for Everyone
Is fine art a good investment? We say it is, as long as you know what you’re getting into and you have the right experts on your side.
Here at Masterworks, we’re on a mission to democratize blue-chip art investing. Think of us as your expert partner. We navigate the art world so that you don’t have to, partnering with CitiBank and Bank of America to research high-growth artist markets with the best potential risk-adjusted returns. We handle buying and selling for you. All you have to do is buy shares and collect your dividends once we sell. Ready to make fine art part of your portfolio? Fill out your membership application today to learn more.