The Top 6 Art Investment Myths

The Top 6 Art Investment Myths

Read on as the Antique Sage debunks the top 6 art investment myths!  So if you are interested in investing in fine art and antiques, but are confused by all the misinformation, untruths and outright lies circulating on the topic, you've come to the right place.


1) Only millionaires can afford to invest in fine art and antiques

The idea that art is only for the wealthy is one of the ugliest, most persistent art investment myths out there.  It has been repeated so many times, by so many different people, that it has simply been accepted as being true without much thought.  This is understandable considering that films, books, magazines and newspaper have, intentionally or unintentionally, equated art investing with the ultra-rich.

And yet it is profoundly untrue, provided we are willing to entertain an open mind concerning what constitutes art.  Vintage mechanical wristwatches, antique sterling silverware, ancient coins and vintage fountain pens are all examples of antiques that are both moderately priced and investment-oriented.  In fact, I believe the greatest investment potential in the art market exists in the under $2,500 segment, with some investment grade artwork available for as little as $100.


2) Only paintings and full-sized sculptures count as art

This is one of those art investment myths born out of ignorance.  We are surrounded by a culture that lionizes the major arts - primarily painting and monumental sculpture - to the exclusion of all other art.  The rest of the visual arts, collectively known as the minor arts, have traditionally been treated as the red-headed step-children of the art world.  They are, at best, tolerated, but usually ignored.  This is a pity, because the minor arts boast some of the best workmanship and most alluring designs from hundreds of different cultures and time periods.  Yet, they receive almost no recognition in the art collecting community.

For example, traditional Japanese lacquerware is one of the most demanding, time-intensive crafts known to man.  It can take months for a skilled craftsman with decades of experience to prepare and apply the 25, 30 or even 40 layers of lacquer necessary to finish a single, high quality piece.  Yet, many Westerners have no idea fine lacquerware even exists, much less the skill and effort needed to create even a simple example.

So while paintings and large sculptures certainly qualify as art, I think that they are among the least interesting parts of today's art market.  The minor arts, with their combination of reasonable pricing and phenomenal workmanship, are really the up and coming market segment.


3) Art is a poor investment compared to traditional assets like stocks and bonds

One of the today's most popular art investment myths is that the traditional asset classes have decisively outperformed art since the mid 20th century.  According to this argument, broad stock market indices have tended to return around 10% per annum, give or take, over long periods of time.  But this assumes that an index investor immediately and unfailingly reinvests those dividends back into stocks - something that wasn't even possible before the arrival of the first index funds in the mid 1970s.

In reality, the growth in nominal GDP in a national economy (or global economy, if you are investing overseas as well) tends to cap long-term returns for all asset classes in that economy.  We can prove this by looking at some annualized, long-term, U.S. asset class returns from 1947 through 2016:

  • U.S. Treasury Bills - 4.10%
  • U.S. Treasury Bonds - 5.36%
  • U.S. Nominal GDP Growth - 6.43%
  • S&P 500 (without dividends) - 7.38%
  • S&P 500 (with dividends) - 11.11%

Notice how all the returns generally cluster around the nominal long-term annual growth in the economy?  That is because the growth in the economy is how these returns are "paid" or transformed into the real purchasing power of goods and services.  The only true outlier, the S&P 500 with dividends reinvested, is a theoretical number that almost nobody actually got, because almost nobody systematically reinvested dividends between 1947 and 2016.

Now that passive ETFs and index mutual funds are everywhere, it is a pretty good bet that stock returns with dividends reinvested will tend to be no higher than nominal GDP growth over the long-term.  It is a bit like Heisenberg's Uncertainty Principle applied to finance.  As long nobody knows about an investment trick, it works great.  Once everybody is aware of its existence, it doesn't work anymore.

Right now, fine art and antiques are the investment trick that nobody knows about.  But these alternative assets have just as strong a claim to future GDP as stocks or bonds.  As an added bonus, because so few people have invested in art to date, there will almost certainly be a period of elevated returns as art prices "catch up" to fair value.


4) Only artworks from famous artists are investable

Another one of those enduring art investment myths is the unyielding belief that it is the artist that makes the artwork.  We have all read or heard stories of paintings by Vincent Van Gogh, Pablo Picasso, Gustav Klimt or some other renowned artist selling for eye-popping, 8-figure prices.  It is easy to assume that these works are famous because they were made by these influential artists.  And there is a certain element of truth to this assertion; a famous maker undoubtedly boosts the value of a work of art.

But, like most art investment myths, this fallacy overlooks a very important fact.  Artists become famous because their art is widely recognized as having great merit.  In the end, it is the visual impact of the art that is important, not who created it.  To put it another way, I would much rather buy a great work by a completely unknown artist, than a poor work by a famous artist.  And make no mistake; there are some world famous artists who have produced some really bad art.

This rule of buying the individual artwork rather than the artist goes double if you hope to make money by investing in art.  The quality of the work you are considering purchasing must always be your primary investment criteria.


5) Fine art and antiques are too illiquid to be good investments

One of the things that everybody loves about traditional assets, like stocks and bonds, is that they are tremendously liquid.  You can generally log into your online brokerage account and execute a trade in just a few minutes (or even seconds).  In contrast, art is not nearly as easy to buy or sell for fair value.  You usually have to consign a piece to an auction house, or sell via eBay or another online outlet.  And because the market is so thin, there is no guarantee that you will walk away with the amount you originally hoped to realize.

And yet, the illiquidity of the art market isn't all bad.  Illiquidity restrains speculation and rapid turnover, meaning that the price you pay when investing in art is more likely to be a fair price, rather than an over-inflated, bubble price.  The U.S. stock market, on the other hand, has been plagued by recurring bubbles during the past 20 years which have whip-sawed weary investors with roller-coaster performance.  One of the reasons for these serial bubbles is undoubtedly the ease of trading in the stock market, which invites frenzied speculation.


6) Art investing is for insiders who can flip works for a quick profit

This is one of those insidious art investment myths - the idea that only "insiders", like art gallery owners, art critics and obsessive connoisseurs, can really profit from art.  The second part of this misconception is that these insiders scour hidden, back-channel sources for great art before anyone else even knows it's even there, and then turn around and almost immediately resell the works for big profits.  The sky-high bubble prices of contemporary artwork just a few years ago certainly adds to this perception.

But the reality is that most money in art is made by dedicated, but otherwise average investors who purchase good works at reasonable prices and then hold them for decades before selling.  In fact, I think that the minimum investment holding period for fine art and antiques is realistically 7 to 10 years.  Anyone looking to hold an artwork for less time should expect to take a loss on the sale.

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