Art market still ripe for investment – if you diversify

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'Time' by Becosky available under public license: https://creativecommons.org/licenses/by-sa/2.0/legalcode

The world is currently on a knife edge, poised between inflationary and deflationary trends – but whichever way this tug-of-war ends, those who have put a sensible portion of their money into art will have acted wisely. That is the view of US lawyer and finance commentator Jim Rickards, an art investor and author of the New York Times bestselling book, The Death of Money.

“I am always very quick to say that you should never go all in any asset category – I wouldn’t want to see any client’s portfolio 100% in art or 100% in anything, but for a slice of the investable assets – usually something like 10% – I think art is a very good category to have,” he says.

“I have a lot of reservations about certain asset classes, particularly equities, which most people seem to be driven into by the media.”

Art, on the other hand, has a centuries-long track record of performing well in a wide range of environments.

“I recommend a portfolio that has some cash – maybe 30% – which does very well in deflation, but art will do well in inflation and in volatile times, when it has very good track record of preserving wealth.”

In Rickards’ view, the main pitfall of art as an investment is that it is not very liquid. While it does a good job of preserving wealth and keeping ahead of inflation, it is not something you can sell quickly if you need cash.  For this reason, it is important to also have cash in your portfolio.

“When you put money in art you should be prepared to be in that for five, maybe even seven years or longer,” he says.

He believes there is no reason to fear making such a commitment this year – as long as you avoid putting a large portion of your income into art.

“I don’t think it’s too late, and that all the gains are gone, or that if you invest now you are buying at the top of the market. It’s still a good investment notwithstanding the recent performance, and that will continue for a number of years.  Nothing’s going to go up 20% for ever – I understand that – but the market will remain strong. And if you invested five years ago you’ve done very well up to date.”

While Rickards does not see the art market as being in a bubble, he does believe that certain categories of art, or certain artists, such as Warhol, have become over-inflated. However, in general the art market is simply exhibiting strength in times of economic uncertainty.

“All over the world, the art market is reflecting fears and some genuine interests; there is certainly more interest in reading about art than reading a prospectus on a company. It is reflecting a genuine desire to preserve wealth, and it does not have the characteristics of a bubble which we for some time have seen in other categories.”

He adds that while certain trends have become very hot, a good rule of thumb is to build a broad and diverse art collection, avoid the artists who have become over-inflated, and buy the best quality work that you can find.

“You’ll never go wrong with quality – but avoid being taken under the wing of a dealer and ending up buying three, four or five pieces by the same artist: that’s rarely a good idea. Diversification works in more ways than one. If you’re buying individual pieces, spread them around a number of artists and if you’re going to buy into a fund, make sure that’s what the fund managers are doing so you avoid that concentration of risk.”