The following is a sponsored post from Masterworks.
The prices paid for paintings in the New York November auctions were eye-popping by anyone’s standard. You may have caught some headlines in the New York Times, like the Edward Hopper painting Chop Suey going for $92 million. But did you know that Barney A. Ebsworth first purchased the painting for just $180,000 in 1973? This means that in less than 50 years the value jumped 51,000% (!) (which averages out to a compound growth rate of 13.3% annually).
While most of us don’t have the millions of dollars it takes to buy a Hopper, we should still think about investing in fine art. And now that’s possible — Masterworks has developed an online platform that will allow everyone to buy shares in multi-million dollar works.
Why Invest in Art?
Many people overlook art as a viable investment option. I mean, we see it in museums, we hear about the exorbitant prices (such as above), but we don’t have access to the kind of capital and connections it takes, so we forget about it as an investment. But that shouldn’t be the case, and here’s why:
Since 2000, blue-chip artists have exhibited strong risk-adjusted returns, and outperformed the S&P 500 by over 250% without dividend reinvestment (and 180% with reinvestment). At the same time, art is not all that correlated with financial markets – in a recession high end art is relatively stable. Not to mention that over time, the number of famous and expensive works available for purchase dwindles as masterpieces become absorbed into permanent museum collections (or sometimes destroyed), so the demand for the scarce works still in private hands becomes concentrated.
Bottom line: Art produces strong risk-adjusted returns.
Why Diversifying Your Portfolio is Essential
The markets seem to have many people worried, so where can you put money besides stocks? And when the markets are all over the place you want to keep your money in several investments that don’t move in the same exact way. Research by Citigroup suggests that art has one of the lowest correlations with the stock market, along with Cash and 10-Year US Treasury Notes. Meanwhile, Art appears to be the most correlated with Commodities – which reaffirms the view that it is a “hard” asset.
Art Was More Stable than the S&P During the Last Financial Crisis
The performance of the art market is determined by the number of sales and the prices paid for individual works. As it turns out, Art is pretty resilient during financial downturns, because its supply is self-regulating, so prices remain relatively stable. When times are tough, owners hold onto their artworks until the market becomes favorable again. The reduction in market supply means that prices see fewer fluctuations in the top tiers, because owners are relatively insulated from economic downturns.
Looking back to the 2008 Financial Crisis, auction records actually broke $2.2 billion that year. The contraction in the art markets began with a six-month lag, and between 2008 and 2009, the art market declined an estimated 26% (based on the Mei-Moses index), while the S&P 500 declined 57% from its peak on the worst day of trading. The art market bounced back swiftly by 2011, while equities didn’t reach pre-recession levels until 2013.
How Much of Your Investments Can or Should You Hold in Art?
Being aware of your investment time-horizon and expectations is incredibly important. For example, the British Pension Railway Fund allocated￡40 million (roughly 2.5% of their total assets) to art and collectibles, in what turned out to be one of their best investments. The art holdings were liquidated between 15 and 25 years later, but not all investors want to keep their money locked up quite that long. Based on the Citigroup research allocating 1.4% to 4% of your portfolio to fine art is recommended, if you’re willing to hold between 10% and 15% in liquid assets.
How Masterworks is Changing the Industry
Now, you’re probably thinking that art is an interesting investment, but you just don’t have the capital to go and hire an art advisor and drop $2 million + on a Warhol. Thankfully a start-up called Masterworks is making this possible for you.
Masterworks purchases blue-chip paintings with strong appreciation histories from auction houses and then files them as Reg A+ Public Offerings with the Securities and Exchange Commission to take their paintings public. Right now, they’re taking reservations for shares in a Marilyn Reversal painting by Andy Warhol and a painting by Claude Monet called Coup de Vent. Due to favorable market conditions, Masterworks successfully purchased these paintings at or below their appraisal values so that you can get the most out of your returns.
Masterworks also helpfully provides a resource center where you can learn more about the art market to help you make informed investment decisions. You should definitely check them out, because they are the first and only art investment platform of this kind.
See disclaimer at www.masterworks.io/disclaimer.