Art Investment: The Cold Hard Truth pt. 2 (Time Will Tell) – artmarketblog.com
Is art a long term investment?
Yes, art is definitely a long term investment. In fact, art is really only a good investment if it is able to be held for long periods of time. As an indication of how long an investment in fine art should be held, most fine art funds require a ten year commitment – the same length of time that I would recommend anyone investing in art should be prepared to hold on to their investment for. Although it is quite old, a study completed in 1985 by Michael F. Bryan on behalf of the Federal Reserve Bank of Cleveland titled ‘Beauty and the Bulls: The Investment Characteristics of Paintings’ provides a good insight into the characteristics of the art market. According to Bryan: ‘Over the 15-year period (1970-1984), the rate of appreciation in paintings typically outpaced the rate of increase in the general price index (consumer price index). However, within short intervals (1973-1977and 1980-1982), painting’s price appreciation did not keep pace with inflation. During one year of inflationary pressure (1980-1981) paintings actually depreciated in value. In short, while the rate of appreciation in paintings is positively related to the general price level, and moreover has outpaced inflation over the full period of analysis, its year-to-year performance has been considerably volatile.’
Dr Rachel Campbell, an Assistant Professor of Finance at the University of Maastricht , came to a similar conclusion as Bryan in her paper ‘The Art of Portfolio Diversification’. According to Campbell: ‘High volatility stems from the whimsical nature of the Art market to current trends and fads in society’s taste for Art. The nature of Art shall always be subject to such trends and as such results in a higher volatility portrayed in the prices and returns found in the Art market. A more prudent investor can alleviate the peaks and troughs from the returns on the Art market by focussing on the longer-term investment. Moreover, the high transaction costs involved with investing in Art result in the benefits tending to be reaped on the longer term.’
What the two studies above show is that although the average yearly return is quite high over a long period of time, those paintings that did increase in value often did not do so in a linear fashion. In fact, the year to year change in value can be considerably volatile. What the two studies also show is that just because you hold your investment in art for a long period of time, you are by means guaranteed to end up with a painting worth more than when you purchased it. Due to the changing tastes and fashions of the art world, as well as the various economic factors that play a role in what people are willing to pay for fine art, the rate of return over the short term can undergo major and rapid changes.
The key to successful art investment is being able to know when the best time to sell is which may mean utilising the services of an advisor or consultant. It is also extremely important to know how much you need to sell your art investment for to cover the selling costs, and to make a percentage profit that you are happy with. Because of the nature of the art market it is important not only expect to have to hold your art investment for a long period of time, but also to expect to have to sell your investment at any time if the opportunity comes along to make a considerable profit. A particular event or occurrence could potentially have an extremely positive effect on the value of your art investment which would be too good to ignore, but could also eventuate at any time with short notice. Therefore, I cannot stress enough how important it is to know how much you need to sell your art investment for to cover the selling costs, and to make a percentage profit that you are happy with, so that if an opportunity comes up to sell your investment you are able to make an informed and quick decision. In short, be prepared to hold your art investment for a long period of time, and also be prepared to sell at any time.
**Nicholas Forrest is an art market analyst, art critic and journalist based in Sydney, Australia. He is the founder of http://www.artmarketblog.com, writes the art column for the magazine Antiques and Collectibles for Pleasure and Profit and contributes to many other publications
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