When we invest in anything, we are aiming to maximize our return on investment while maintaining a reasonable amount of risk. Return and risk must be balanced in all financial investments. Investing in art is the same way. “What is the projected rate of return, and what are the risks?” we must question. Aside from these requirements, art investment has further advantages. So, let’s take a look at these art investing difficulties.

Return on Investment

It’s impossible to calculate the rate of return on an electronic arts investment. The challenge is coming up with a performance indicator that appropriately represents changes in art values. Because we’re talking about investing, I’m just looking at what I term investment-grade art. This is the type of work that large auction houses like Christie’s and Sotheby’s offer, not the type of art you’d see in a downtown gallery. This criterion, however, is not exact. Several indices have been developed to track changes in art values. The Mei Moses All-Art Index is one of the most well-known investment-grade art indexes.

Other forecasts for art price rise have been less bullish. In fact, according to some calculations, the rate of return is close to zero. According to research led by Luc Renneboog of Tilburg University in the Netherlands, the rate of increase from 1970 to 1997 was roughly 4%. We may estimate that the long-term rate of return for investment-grade art is anywhere between 2% and 6%, with 4% being a reasonable estimate depending on the art bundle. In today’s environment, were certificates of deposit are returning close to 0%, a 4% return on great art may seem appealing.

Diversification of Assets

Asset diversification can minimize the total risk of a portfolio of assets, according to a basic assumption of financial management. Adding new financial assets to a portfolio should lower risks, especially if the new asset’s performance does not immediately correlate with the performance of existing assets in the portfolio. Although stock and fine art price movements are frequently mirrored, they are not always exactly in sync. Stock values are frequently influenced by economic activities, but great art is not.

Hedge Against Inflation

Real estate may be used to protect against inflation. Inflation, on the other hand, can erode the value of monetary assets such as bonds and certificates of deposit. Art is actual property, much like real land, currencies, and gold. Despite the fact that the supply of art is increasing, the demand for investment-grade art is increasing even faster. Renoir and Picasso haven’t painted in a long time. During periods of hyperinflation, the values of investment-grade fine art have always skyrocketed.

Tax Benefits

Long-term earnings, as previously stated, are taxed at a lower rate than ordinary income. Furthermore, if the owner contributes the art to eligible nonprofits, such as museums, a portfolio of art may qualify for further tax benefits. Fine art assets, on the other hand, can play an important part in an individual’s estate planning.

Although current lower long-term capital gains and inheritance tax rates have helped to minimize many of these tax benefits, these tax cuts are set to expire in the coming years. New tax schedules might arise that favor the tax benefits of art assets once more.

The Pleasure of Collecting

Other benefits can be received from art investment, such as the pleasures of collecting and presenting art. One may argue that if you’re going to collect art anyhow, you might as well take it seriously with the goal of eventually profiting from it. If you’re looking for a way to make money, you run the risk of having a collector’s attitude.

When investors sell art to collectors, they gain money, not the other way around.

Summary

So, why should you spend money on art? The most convincing explanation is that diversity reduces portfolio risk and acts as an inflation buffer. Although a return on investment of 4-6 percent outperforms money-based assets, it lags behind equities and precious metals. Price, on the other hand, reflects supply and demand. As modern artists gravitate toward electronic art media, the quantity of investment-grade art is dwindling. Paint on canvas is no longer fashionable among today’s artists, and new computer art forms offer little to the inventory of commercial art. This tendency may not be immediately apparent in the art market, but it has the potential to have a significant impact in twenty or thirty years. And investing in art is usually a long-term commitment.

Art investment may become “profitable” by combining the potential financial rewards from investing in work with the emotional pleasure of owning and displaying the art.