Investing In  Art
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Why Not Invest In Art ?


There are dozens of articles on the internet praising the potential of art in an investment portfolio. In my article ‘Why Invest in Art,” I outline many of the reasons to invest in art. But the prudent investor should not overlook the many reasons not to invest in art.

Rate of Return

The expected rate of return that you might expect from your portfolio of investment grade art will be around 4%. Compared to interest-bearing investments, this is not poor return, but compared to the long-term rate of return for stocks at 6%, the return is inferior especially when you considered the heightened risks that are associated with art investment. I speculate that the long-term prospects for fine art are positive, but this time frame is in decades not years.

Risk

Nature morte à l'azalée by Marc ChagallThe volatility of art prices are similar to those of equities, and is probably a bit higher. Although the art of the very highest echelon of artists, such as Van Gogh, Klimt and Picasso hold their value, prices of secondary investment artists are much more volatile. And even major artists will have art that tumbles at times at auction.

Besides financial risks, art is also subject to fraud risks. We don’t have to look far to see such risks in other financial markets, which are supposedly regulated. The art market is basically an unregulated market, and it has its share of schemers.

The value of art is purely subjective. I have been asked many times why a particular artist or piece of art is valued as it is. My answer, “Art is what people will pay for it.” The value art is subject to persuasive manipulation of its sellers. Appraisals, although can be helpful, can also be almost fraudulent. As an art appraiser, I have had collectors show me appraisals for artwork that signficantly overvalue the art. Recently, a collector wanted me to reappraise a Norman Rockwell print, which he had an appraisal stating the print was worth $70,000 in 1970. He was optimistic a new appraisal would push that price even higher. He was not to pleased to receive my appraisal of $750.

Even dealers who are honest can sell work that is not what it is presented to be. Spectacular art forgeries have been perpetrated against some very knowledgeable individuals including the major auction houses. When a collector buys a piece at auction, he assumes the piece is genuine. If it is not, the buyer has little recourse unless he can show that the seller was aware that it was not genuine. A million dollar painting that is discovered to be a forgery is basically a million dollar loss, and there is not insurance that can absolutely protect the buyer from this possibility.

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