Log onto the next Christies online auction, and you’ll see hundreds of fine works of art for sale at mind-boggling prices.
Those investors wishing to diversify their assets should take serious consideration of putting a portion of their funds into fine art.
Hard Assets Explained
As investors, we classify fine art into a category known as “hard assets.” Hard assets, or tangible assets, are items you can hold in your hands. Real estate, bullion coins, collectible coins, and jewelry are a few good examples of hard assets that store the value of your money over time.
Fine art looks fantastic hanging on your living room or study wall, and it’s a great way to provide you with an appreciation for your money. In most cases, hard assets retain their value over time. For instance, gold coins are a popular means for investors to protect themselves against the depreciation in the dollar. Since the advent of the Federal Reserve in 1913, the U.S dollar has lost over 95-percent of its purchasing power.
Fortunately, the Fed managed to export the majority of its monetary inflation to other nations via means of the dollar being the world’s premier reserve currency. Transactions on global markets for commodities, such as precious metals, corn, pork, and oil, all receive settlement in U.S dollars. As a result, nations that want to trade in these commodities need to maintain a reserve of the U.S currency to trade internationally.
Let’s look back to our example of gold coins. In the early 1900s, a fine men’s suit would set you back one gold coin. Today, it’s still a reasonably similar price range, with the average cost of a fine suit being between $1,500 to $2,000.
Thus, we can see how putting your money into gold over the last century, would have stored the value of your wealth, avoiding the 95-percent devaluation in the dollar. If you did decide to keep your dollars in the 1900s, instead of putting your funds into gold, then your wealth would have lost 95-percent of its value.
Speculation Assets Explained
When we look at hard assets, various classes offer a store of value for your money, and others that offer you the chance to make a profit on the value of the asset at its time of sale.
Gold coins are not an example of speculative hard assets, as they don’t increase by a significant amount of money. Instead, gold coins provide investors with a hedge against inflation. While this hedge is a vital part of maintaining your wealth, it’s still not going to earn you a massive profit, as it would if you transferred the money into a business or real estate that makes you a passive income.
Investing in stocks is probably the most common form of speculative investing. You buy a stock at a specific price based on information from your broker, and if you get in with the right stock, you stand to make a profit that could exceed anywhere from two to 100-times your money.
However, stocks are a risky asset class to invest in, and the potential for financial reward also comes with a significant amount of risk attached to the deal. There’s always a chance that the market could crash, and your stocks could end up below the price you paid.
Speculative Assets and Fair Market Value
Other speculative hard assets are not as prone to violent market shocks in the same manner as stocks. Collectible coins and fine art are fantastic examples of these assets.
Pieces of fine art are bought and sold across the world by numerous high-level wealthy investors. The market retains its value due to demand, and demand continues to soar for these assets. More billionaires are minted all over the world every year, showing that the elite class of the super-wealthy continues to expand, even if the rest of the population continues to slip further into poverty.
- According to studies, 1-percent of the world’s population is currently in control of more than 60-percent of the world’s assets, and this figure continues to rise.
- In 2019, there are over 2,200-billionaires, from countries all around the globe.
- Statistics also show that 2018 experienced the rise of other 150-plus billionaires from the previous count of around 2,050 in 2017. This figure continues to rise.
Statistics show that the United States alone has over 11-million millionaires as well, with thousands more in various countries around the world, China being one of the fastest-growing countries minting new millionaires and billionaires.
Wealthy people don’t like to lose their money. While they want to keep a significant amount of cash around and invest into other assets like businesses, real estate, and stocks, they also like to put a percentage of their portfolios into fine art as well.
As a result, this creates a significant amount of demand for fine artworks, with prices of some pieces going for outrageous sums.
A recent example is the painting created by the mysterious London street artist “Banksy.” In 2018, his first-ever work of art sold by an auction house went for a staggering $1.4-million.
However, in this transaction, Banksy had the last laugh, and moments after the gavel stuck announcing the winner of the auction, the painting sent itself through a shredder installed in the frame.
The auction house refunded the investor, but it’s a clear example of the speculative nature of fine art, as well as the high demand from the wealthy.
In 2017, the “Salvator Mundi,” a 600-year-old work of art by the legendary Leonardo da Vinci, sold for $450-million, in another example of how investors can’t get enough of fine artworks. These examples.
Within 48-hours of closing the deal, the buyer received an offer from a Chinese billionaire requesting the sale of the painting to their estate for 550-million. The investor did not sell, but it would have been an easy way to make a $100-million profit in less than 2-days af6ter the initial investment.
As long as there is demand, the price of speculative assets such as fine works of art will continue to rise.
The Downside of Speculative Assets.
There is a downside to investing in speculative hard assets such as fine art. These assets are prone to damage, theft, and loss. Imagine if the owner of the $450-million painting mentioned, were to have a burglary on their property, and thieves steal the art? These types of robberies are the stuff of Hollywood films, but it does happen.
Many investors will donate the fine works to museums for the public to view while retaining ownership over the painting. In most cases, the galleries or museums will pay the investor a monthly fee to house the art.
In 1990, the largest theft of fine art in history occurred at the Isabella Stewart Gardner Museum. Thieves stole 13-paintings, with a total value of $300-million from the Boston premises. To date, the authorities have yet to recover any of the artworks. However, most investors take out insurance on their artworks, and the underwriter takes the fall in the case of a theft.
Nevertheless, fine art is not without its risk, but it’s challenging for thieves to move these assets, with their only option is putting them up for sale on the black market. Stealing and reselling other hard assets like bullion coins is a far easier task for criminals, as the coins have no identifying marks, and the liquid market makes it easy for the thieves to sell the bullion.
The Advantages of Speculative Investing
Investors that put their money into fine art mostly hold for the long-term. These individuals are not concerned with making a profit. Instead, they focus on storing the value of their wealth in an appreciating asset. As the years go by, the art steadily increases in value as the market continues to expand, driving demand.
It should come as no surprise that art auction houses continue to set records for deals made by the investment community. No other form of investing can match the returns investors make with fine art. As with the examples above, they could purchase a painting for a few million dollars, and resell it in a few years for ten or twenty times that amount, netting them a healthy cash profit.
The key with speculative investing into fine art comes from timing the market. As with any other market for assets, there are times in the market when a sale will net you a higher return on your painting. The key is to sell when the market is hot.
Since most investors have their wealth tied up in other asset classes, they are prone to fluctuations in the global markets, and their net worth depends largely on economic conditions. During periods of economic expansion, investors tend to plow their money into assets that are rising along with the sentiment in global markets. When the markets fall, they like to diversify into other asset classes, such as bullion and fine art.
This strategy helps them to preserve their wealth, and it’s the reason why we see the largest sales of fine art occur during periods of economic contraction in the global markets.
Finding a Fine Art Investment Consultant
The key to getting a good deal when investing in fine art is knowing what to look for when making a purchase. You don’t need millions of dollars in your account to make a fine art purchase. In some cases, you could pick up a piece for a few thousand dollars, and the sell t in a few years for ten times what you paid for the piece.
Your success with the asset class requires specialized knowledge of what presents excellent value. For example, if your daughter brings home a painting from her fine art class, there’s little to no chance of that painting every selling at auction for millions of dollars.
In this example, your daughter has no reputation as an artist, and no backing from international arthouses. Therefore, there is no demand for her painting – even if you think it’s a masterpiece.
However, professional art investors rely on the expertise and market knowledge of art consultants that specialize in the field of buying and selling fine art. However, not all consultants are equal in their knowledge and expertise, and it takes more than an eye for good art to achieve success in their field.
Professional investment consultants in the fine arts world have reputations, and many investors may use the same consultant for their investments. Therefore, it’s critical that you source a consultant that’s a reputable expert in the field that you wish to invest into with your money. For example, if you were to ask the consultant that fielded the deal for the $450-million Da Vinci, to help you with selecting a painting for $20,000, they would probably laugh at you and hang up the phone.
However, there are plenty of professional consultants that work in many different price ranges. You can get hold of one of these consultants but asking the gallery or auction house whom they recommend. These establishments have working relationships with these consultants, and they’ll put you onto the right consultant to suit your investment category.
How Much of Your Portfolio Should You Invest in Fine Art?
The returns from investing in fine art can be staggering. However, this doesn’t mean that you should dump your life savings into fine art in an attempt to make a profit. As an investor – diversification of your assets is key to growing your wealth.
Experts recommend that you should only attribute 5-percent of your total wealth into fine art, with the high side being a maximum of 10-percent. Overstepping this limit will place your wealth in danger, and may make you desperate for a sale if you experience a financial setback.
The idea of investing in fine art is that it’s for the long-term. Selling during a cold market could cost you tens of thousands of dollars in potential profits you could make in a hot market.