It takes more than money to make a sound art investment. Constructing a successful, diversified investment portfolio isachievable with properly integrated data from analysts, strategists, economists, and art experts.
The best strategy is to invest in what you understand.Before purchasing art, be able to answer the following questions:
1. What are my realistic investment objectives?
2. What dollar amount (principal) will be spent yearly (or within a 10-year period) for art? Stick to a budget and seek to find superior examples of art, regardless of your budget.
3. Are investments long or short term? Long-term investors often buy art to sell after retirement. They either sell for long-term capital gains, gift to family members or donate philanthropically to museums for tax and estate benefits. Long-term rates-of-return are affected by inflation, deflation, recessions, and depressions.
4. Do you expect an annual rate of return (short-term investment)? If you need cash in the short term, do not buy into high volatility, risky art trends that can lose momentum during economic downturn periods.
5. What estate issues and tax strategies do you want an art portfolio to cover?
6. Can you handle risksthat cover damage, theft, an expert’s changing of an opinion, or the threat of losing purchasing and selling power if the market skyrockets or collapses? Liquidity risk: If you need to sell when everyone else does, assets are not easily convertible to cash. Market risk relates to buyer-seller volatility, price history, and economic growth and decline. Fine examples of art purchased below market value usually are low-risk investments.
7. Will you take out loans to purchase art or use art to secure loans? Can you manage debt appropriately?
8. What accumulated interest is lost if you take money from CDs or a saving’s account to buy art? Will the net from an art sale be higher than its cost (plus interest lost) after taxes are paid on gains?
9. What minimum and maximum loss is affordable? If you do not correctly scrutinize market logic, investment errors may lead to lost capital. Are you willing to cut losses and reinvest? Losses are tax-deductible and can offset capital gains.
10. What reliable dealer or expert will help find art that best suits your needs? Make certain said dealer/expert has the credentials to back his or her claims.
11. What criteria do your dealer-experts have? Do they know art-related and marketing laws and understand fully how taxation impacts investor sales and donations?
12. How will you insure and protect art investments?
13. What criteria must the art you purchase have? Will you only buy signed work? Will you only buy oils or watercolors, or specialize on a certain artist, group, subject or style of painting? Will you purchase what you like? In this last scenario, what you like may or may not be a sound investment.
Shifts in capital flows and competitiveness alter marketability. Evaluate potential profit adjustments in response to economic conditions, market trends, and personal needs. Review and reassess goals, risk tolerance and the nature of a collection’s focus, in order to put in place appropriate strategies and time frames for buying, holding, selling, and donating.
An art investor ideally seeks to purchase rare, prestigious artwork to sell, bequeath, or eventually donate for financial gain or tax benefits, whereas an art collector focuses on art’s aesthetic and stylistic virtues and wants to enjoy art as it enhances a surrounding.
Investors hang attractive art, but they concentrate on buying for financial growth, rather than to have art please or decorate. If a person buys aesthetically engaging artworks that escalate in value, it is the best of both worlds.
A serious high-end art investor has a firm understanding of social and economic trends, art market developments and is informed about what is coming in or going out of vogue that might alter art’s value. He or she usually has consummate taste; is able to identify what is or is not desirable, fashionable, or authentic; and discerns what current events or promotions could shatter or boost monetary equations and reacts accordingly.
It is far less stressful to collect art for beauty or rarity’s sake than it is to accumulate art with the intent to sell for future financial gain within a specific time frame. Investors who buy artwork to diversify an investment portfolio have to make smart judgments.
They know how to analyze correctly the overall economic health of the financial world and art market. They are adept at maintaining a steady cash flow, so that they can purchase desirable art when it becomes available. Those are not easy tasks! Thus, savvy art investors work with reliable, scholarly dealers who lead them to art that best fits specific investment strategy guidelines and their experts try to prevent them from making poor decisions.
Patricia Jobe Pierce is a freelance writer, art historian, art dealer-consultant, certified AAA appraiser, public speaker, photographer and American art authenticator for museums, auction houses and collectors. She graduated from Boston University with a BFA in 1965, is owner and director of Pierce Galleries, Inc. in Nantucket and Hingham, Mass., and is author of many works, including, "Art Collecting & Investing: The Inner Workings and the Underbelly of the Art World." For more of her submissions, Click Here Now.
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