Art Investments can be extremely rewarding, both from a financial and emotional point of view. But, as with any other investment, art investments can be difficult to navigate. In our previous article, we have explained the different methods you have to invest in art. Now, in this short guide, you can read about the 5 most important things you should do when investing in art.
Invest in what you like
Art is beautiful, in every form. And we totally agree that diminishing it to just an investment asset is sad and completely removes the essence from it. Furthermore, as with any other investment, art investments can be risky and your capital might be at risk. In case things go south, art can still reward you emotionally as long as the art you invested in is art you like. Either from a visual or philosophical point of view.
Invest in what you know
This advice is especially relevant if you have limited time or/and you are new to art investments. Knowing inside out what you are investing in is key in understanding if an artwork is a good investment opportunity or not. Information is key when making an investment decision. And, if you don’t have the time and the resources to research outside your current knowledge, stick with what you know instead to randomly invest in trends or artworks that some friend has advised you to buy.
It is also true that if you keep investing in what you know, you will end up investing in artworks that are very similar and you won’t diversify your portfolio enough. In finance terms, this is called Familiarity Bias. This bias occurs when people invest only in things that are familiar to them. The problem is that this strategy limits the potential pool of artworks you can buy and therefore limits your investment opportunities.
To sum this advice up: if you are a beginner, start investing in what you know. Once you tested how art investments work, start researching for new opportunities outside your knowledge in order to expand your investments opportunities. The bigger the potential pool of artworks you can buy, the easier it will be to diversify your art investments portfolio and lower your overall investment risk.
Conduct your due diligence
Before investing in art, always do your own research. Check for the past transactions of an artist, where he/she exhibited and, if possible, who are the artist’s main collectors to understand the potential growth in value.
Also, always check for the provenance of an artwork you are interested in. For example, if the artwork is created by a living artist and you are buying from a secondary market gallery, ask the artist to double-check it.
Conducting extensive research will minimize your art investment risk and prevent you from buying fakes.
Understand your level of risk
Every person has a different tolerance towards risk. As a general financial rule, however, the younger you are, the more risk you can take. The reason being that, in case you suffer a financial loss when you are young, you still have plenty of years to recover financially before you retire.
Artworks created by emerging artists are cheaper, carry a greater level of risk, but also offer the opportunity for a greater return.
Old Master paintings instead, are usually way more expensive, have a lower risk but also offer less return. As with any other financial assets, the higher the risk, the higher the return. It is as simple as that.
Diversify your art investments portfolio
In order to decrease the risk of your art investments, it is important that you diversify your art and overall investment portfolio. On average, investors allocate about 5% of their capital to alternative assets. Riskier investors allocate up to 15% to alternative investments. Low-risk investors allocate as little as 2-3%.
Out of the percentage allocated to art investments, about 60% should be allocated to safer artworks and 40% in riskier, emerging artists, if you are a high-risk investor.
If you are a moderate risk taker investor, allocate 70% of your capital to safer artists and 30% to emerging artists.
Lastly, if you are a low-risk investor, you should allocate only 20% to emerging artists and the rest of your capital to more established ones.