Is art really a good investment option when compared to stocks and bonds? Maybe. For certain sophisticated investors. In certain circumstances. Investing in a painting or sculpture is certainly not the be-all and end-all that many art fund managers claimed it to be in the earlier years of this millennium. Not surprisingly, many of those funds are no longer around today.
That’s not to say that a knowledgeable collector can’t do well in the art market. Art does have advantages when compared to other financial assets. For a savvy collector, for example, the asymmetry of information in the art market may actually work to their advantage. Quality art tends to hold its value, which makes it, in principle, a good inflation hedge. And of course, unless you store it in a vault in Geneva’s free port, a painting has the benefit of looking good above your sofa, as opposed to a stock certificate.
But when viewed from an investment angle, art also has disadvantages that are often brushed over in the rush to sell a painting or to push an art finance product. For example, art is highly illiquid, which means that an investor may not be able to sell at the right time of the market cycle in order to cash in on his investment. Art has exorbitant transaction and ownership costs. And lastly, the valuation of art is complex and comprises a large subjective component, commonly referred to as the ‘passion premium’.