Why Invest in Art? Continued
As it has been noted earlier long term profits are taxed at lower rates than ordinary income. Plus, a portfolio in art offers the possibility of other tax advantages if the owner donates the art to qualifying charities, especially museums. In the same vein, fine art assets can play a significant role in an individual’s estate planning. Although current reduced tax rates for long-term gains and estate taxes have worked to reduce many of these tax advantages, these tax cuts are scheduled to expire in the next few years. New tax schedules could emerge again favoring the tax advantages of art assets.
Art prices are as volatile as stock prices, but that volatility is not as evident as it is with a stocks. Every day, the investor is confronted with movements of stock prices. Dow Jones falls 300 points, and the value of a portfolio may drop 2%, or when an investor receives his quarterly 401K report, that shows he’s lost 10% of his savings. These losses can be emotionally troubling causing the investor sleepless nights, and perhaps ultimately poor investment decisions. For the investor who owns investment grade art (not art funds, whose volatility is also visible), the declines in art prices are not nearly as noticeable. Plus, every painting has its own sales prospects. Even when general art prices have fallen significantly, individual paintings may sell for much higher than expectations.
The Joy of Collecting
There are other gains that can be derived from art investment -- the joys of collecting and displaying an art collection. One might argue if you are going to collect art anyway, you might as well pursue the collecting seriously with an aim of ultimately making a profit from the process. But there is a danger of developing the mindset of a collector if you are attempting financial gain. Investors make money in art when they sell to collectors -- not the reverse.
So why invest in art? Probably the most compelling reason is the reduction of portfolio risk by diversification and as an inflation hedge. Although a 4-6% return on investment, surpasses money-based assets, it falls behind stocks and precious metals. However, price reflects supply and demand. The supply of investment grade art is diminishing as contemporary artists gravitate to electronic art mediums. Paint on canvas for the current generation of artists is passé and new electronic forms of art-making add nothing to inventory of marketable art. This trend may not be immediately felt on the art market, but could have a tremendous effect in twenty or thirty years. And art investment is always a long term proposition. By combining the possible financial gains from investing in art with the emotional pleasure of owning and displaying the art, then art investment can become "profitable.”