August 27, 2021
Source: US News
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Art is a unique alternative asset class that can add value to your investment portfolio. Experts say it's important for art investors to understand artists, their markets and how art should be managed. Art investing goes beyond finding the perfect sculpture for your dining room. Art can occupy an important space in your portfolio, serving as a hedge against inflation, adding diversification and reducing your portfolio's volatility.
Unfortunately, many investors assume they're locked out of the art marketplace, considering art to be an investment for the ultrawealthy. As a result, most individual investors don't own art as an alternative asset class. Additionally, the onset of the coronavirus pandemic presented a challenge for the art market, with global sales of artwork and antiques in 2020 totaling just $50 billion, a 22% decrease from the previous year, according to the Art Basel and UBS Art Market Report. "Art as an asset class is typically underinvested in because investors have limited access to the highest-quality works," says Cynthia Sachs, CEO and chief investment officer at Athena Art Finance Corp.
While most investors don't have millions of dollars for a Claude Monet painting, there are now opportunities for them to allocate funds to this unique asset class. And while 2020 was a difficult year for the traditional art market, online sales reached a record $12.4 billion, double that in 2019.
With the growing art market and proliferation of platforms that are providing a means of entry to this investment, you may be curious about how to navigate the market dynamics of this alternative asset class. Art can serve many roles within an investment portfolio, making it an attractive asset for retail investors.
First, art can act as a portfolio diversifier. By allocating a portion of your portfolio to this asset, you're reducing your risk exposure by spreading your money across different investments. This is important because art is an asset class is that not correlated to other major asset classes in the stock market. This means that when traditional assets like stocks or bonds perform poorly, alternative investments like art tend to hold market value.
Art as an investment can also be a way for investors to preserve their wealth, experts say. Art serves as a hedge against inflation.
"Artworks are a physical asset, and physical assets tend to perform well in inflationary times," Sachs says. "And given that we're now going through a inflationary phase in our macroeconomic cycle, art can be a very nice inflation hedge."
While there's risk with any investment, one of the benefits with art is it's not an asset that's largely impacted by market volatility. Unlike equities, which are sensitive to market movements, the art market has steadily grown over the years, and traditional physical fine art tends to maintain or increase its value over time.
You will not see the same volatility in the art market as in the equity market because the blue-chip art market has rare, desirable assets, Sachs says. So art will continue to have some support in the event of negative market news.
These benefits, however, can backfire. One of the risks associated with art investments is their lack of liquidity. If you want to sell a physical piece of art, you would do so through an art gallery, auction house or an art collector. This can be a time-consuming process.
Given that art is not an asset that's bought and sold frequently, Sachs says, this poses liquidity risk that you don't have in the equity market. This makes art more of a buy-and-hold asset class.
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