Indra Kimmele: Investing in Art – Why and How to Invest

Investments can be very diverse and you can also invest your private money in the arts, and this investment will have added value that no other type of asset will have. Investments in art are popular in the world and the first art fund was established more than a century ago – in 1904, while the number of people in Latvia who invest in art professionally, participating in auctions and creating art collections is still relatively small.

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Art belong to alternative types of investment. This means that works of art cannot be traded on a stock exchange in the same way as stocks or bonds. However, investment in the arts, especially in the visual arts, is a significant part of global investment.

It is estimated that the total value of the works of art in which people have invested their money is about $ 1.7 trillion. Most are invested in contemporary art, followed by impressionist works and only then works by old masters. The return on investment is relatively high, with a return on the entire asset class of 8.3% between 1985 and 2020, and as much as 11.5% for contemporary art. , the importance and role of art in investment management has grown over the last 10 years and it is no longer a question of whether art is part of it, but how to integrate it more effectively into the investment portfolio.

However, it cannot be assumed that the value of works of art will increase all the time and the return will be safe and stable. The return on investing in art and investing in stocks or real estate is comparable, but the risks are different. The value of works of art does not follow financial market fluctuations, which ensure stability in changing market conditions. However, these investments are characterized by other risks related to the physical storage and liquidity of works of art or the possibility to sell them relatively quickly, as well as counterfeiting of works. There is also a risk of purchasing authors’ works, the price and market value of which are not rising as expected. Even very valuable works of art can fall in price.

Portfolio diversification and investment availability

There are various reasons why investors choose to add art to their investment portfolio. This can be a great way to diversify your investment portfolio or a good hedge against inflation. However, in order to diversify the portfolio, it is necessary to buy not one, but several works of art.

Investing in art can require a fair amount of start-up capital, but you can start by investing in the work of young and lesser-known artists, who usually have a lower price.

Here, however, you have to take the risk into account: will you choose the right artist who will become popular in the future and whose work will be in high demand, ie whether the value of your investment will increase in the future. In addition, it should be noted that historically higher value added is shown by more expensive works of art than works by young artists. Therefore, investment in art is often encouraged by those investors who are really interested in it, because even if the price falls, they will have an aesthetic pleasure that no other type of investment provides.

Also in terms of maturity, this is a long-term investment and the time horizon may have to be chosen even longer than for investments in the financial markets – the minimum is about 10 years, but the preferred term is around 20 years.

New trends in the art market

There has been a recent trend in the art market that allows private investors to invest in smaller amounts. Investing in art is conditionally securitized, which means you buy a small portion of a work of art that may be worth millions. Therefore, as with investing in gold, it is not always necessary to acquire a physical asset to participate in this market.

Investments in cryptography or various digital works of art, such as videos, collages, GIFs, digital stickers, etc., are also becoming more popular. Works of art can be purchased and sold in a number of digital markets, and their storage and ownership are secured by blockchain technology. According to Deloitte Tax & Consulting Luxembourgh, the traditional art market is at a turning point, which will change the understanding of what an 21st century art business is. Younger collectors believe that technological advances in art and finance will come even closer and the impact will be felt in the coming years. However, it must be borne in mind that the market for digital art has not yet developed, so the risks are high and special care must be taken.

Sustainability and impact issues are also increasingly affecting the art market. Companies invest in art collections to achieve their sustainability goals by taking care to preserve certain works of art. In this case, it is not the ownership of the work of art that is more important, but the care shown.

With what to start?

To start investing in art, you need to start with visits to art exhibitions, meet with gallery owners, talk to collectors, curators and artists. In order to gain experience, you can participate in various art fairs and analyze their results, trying to draw conclusions about why, for example, a particular work of art cost so much. I recommend starting with investments in Latvian art – it is possible to buy works by both old masters and contemporary authors in various galleries, which will be much more accessible financially than the works of world-famous artists. If the advantage is greater, you can look more broadly, because the investment opportunities in the global art market are also different, but I definitely recommend asking for advice from an art connoisseur who will help you navigate the world of art and its trends.

* Source: Citigroup: The Global Art Market and Covid-19

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