Is artwork a wise investment?

Whether you like Mark Rothko’s large abstract paintings or not, there’s no doubt that they’re valuable. In 2012, a Rothko canvas fetched a record $87 million at auction. More recently, a collection featuring other American abstract expressionists, including one piece by Willem de Kooning and one by Jackson Pollock, set new records. The collection sold for $500 million in one of the highest-priced private art deals ever.

Such multimillion-dollar price tags are apt to draw some opportunistic investors into the art market for the first time. But investment experts and art curators alike caution would-be art investors considering this potential asset class to beware. Investing in art is not for the faint of heart.

Art can be a risky investment. Like fashion, artists and their work go in and out of style, affecting the resale value and return on investment. Art acquisition comes with considerable extra costs, such as commissions and insurance. Perhaps the greatest risk, however, is that there’s always a chance of forgery, theft or damage.

“Most people start collecting because they’re interested in and want to learn more about the visual arts,” says Robin Anthony, curator of the Royal Bank of Canada’s 4,500-piece corporate art collection in Toronto. “Some collectors become investors.”

A growing number of wealth managers — 78 percent in 2015 versus 55 percent in 2014 —  think art and collectibles should be part of an overall wealth management strategy, according to Deloitte’s Art & Finance Report.

Still, fine art and other collectibles owned by ultra-high net worth individuals globally account for just 2 percent of total portfolio allocations, according to a Knight Frank report.  

That disconnect doesn’t surprise Don McNeil, curator of RBC Wealth Management-U.S.’s 400-piece art collection on display at its downtown Minneapolis headquarters. “Investors should buy art for personal reasons,” says McNeil. “To expect that works of art will have some significant appreciative value in your lifetime, that’s different.”

Understand the art market

Some investors may look to art as a way to diversify their portfolio away from traditional stocks and bonds. Indeed, in addition to a “passion for the investment,” investors surveyed by Knight Frank cited a desire for “further diversification” as a top reason for wanting to invest in fine art and collectibles.

But the illiquidity of art and a thinly traded market can make art a riskier investment compared to stocks, says Liz Jacovino, a wealth strategist for RBC Wealth Management-U.S. based in Connecticut. “We know that stocks trade Monday through Friday from 9:30 a.m. to 4 p.m. Eastern time,” she says. “The art market doesn’t have a specific time frame. You might have a piece you’d like to sell, but there might not be a market for it.”

In fact, global art sales declined 7 percent from $68 billion in 2014 to $64 billion in 2015 due to weaker world economic conditions, according to the European Fine Art Foundation (TEFAF) Art Market Report by Dublin-based Arts Economics. However, U.S. art sales rose 4 percent to their highest ever total of $27 million.

“If investors insist upon art being part of their portfolio, I suggest they work with an art investment advisor – someone who understands the art investment environment and the intricacies of art,” says Jacovino. “As a general rule, I don’t recommend it.”

Approach art as an investment

To invest in art, a person should abandon notions of “what you like and don’t like,” says McNeil. Yet that approach is fraught with risk. Trying to predict emerging trends is a considerable challenge, particularly for those new to the art market. And you may end up with a piece of art that you don’t enjoy or appreciate.

Picking a winner is, well, more art than science. Just 1 percent of all artists generate more than half of all artwork sold globally, according to the TEFAF Art Market Report. There is no magic formula to identify which artists will be the most sought-after or successful, and no guarantee of a positive return on investment.

Still, research is key – just as it is for other investments, from stocks to bonds to real estate – says RBC’s Canadian curator. Anthony advises would-be art investors to read about art and artists, visit museums and galleries, and establish relationships with artists and art professionals.

And how much should they be prepared to spend? A contemporary piece at auction is likely to sell for $1 million or more, says McNeil. For those who just want to dip their toes rather than dive into the art market, they can spend $5,000 or less for a work by an up-and-coming artist represented by a reputable gallery.

Another option is to invest in mutual funds that invest specifically in works of art. RBC Wealth Management-U.S. does not offer third-party art funds, but there are some such funds that investors can explore with their investment manager.

Concerns about authenticity and forgery exist in certain markets, such as classical art, but those risks may be decreasing. In 2015, 62 percent of wealth managers told Deloitte that a lack of regulation was the main challenge to offering art investment services, down from 83 percent in 2014.

Compare returns over the long term

Art investors must contend with a high degree of uncertainty. “Who knows what’s going to happen to any particular artist?” says McNeil. “As far as the investment goes, the value is in the resale value.” Take Vincent van Gogh as an example. The painter apparently sold only one painting in his lifetime, but nearly 100 years after his death, one of his “Sunflowers” sold at auction for almost a million.

Popular art is largely based on what sells. Currently, contemporary art is hot: it accounted for 46 percent of the value of global art sales in 2015, according to the TEFAF Art Market Report. “The vast majority of art produced in the world has no resale value at all,” cautions McNeil. Would-be investors can educate themselves by researching prices through auction houses or online databases such as ArtNet.

Another key consideration is long-term financial performance. Data shows that equities perform better than art over the long term. Over the past 20 years, the Mei Moses World All Art Index posted a compounded annual return of 5.3 percent versus 8.3 percent for the S&P 500 Total Return Index. That gap narrows over the past 50 years: the All Art Index returned 7.9 percent vs. 9.7 percent for the S&P Index.

Similarly, a 2013 Stanford Graduate School of Business study found that art investments don’t substantially improve the risk-return profile of a traditional portfolio. It found that the average annual return of paintings sold at auction from 1972 to 2010 was 3.5 percentage points lower than thought, after adjusting for art that sold more frequently and at higher prices.

Buy it because you love it

Other advantages, such as the cultural benefits of art, are harder to measure. “Art creates conversations and engages people to think,” says Anthony, adding that RBC’s entire art collection, including work by Canadian artists Geoffrey Farmer and Julia Dault, is displayed for employees and customers to enjoy.

Collectors are increasingly combining their love for art with investing. Nearly three-quarters of art collectors said they buy art for passion, according to the Deloitte report.

For Jacovino, her recommendation is to buy art “you like because it will be in your house for you to enjoy everyday.” It might appreciate in value one day, but don’t invest in art as a way to save for your kid’s college education.