Last week art expert and advisor Carole Pinto talked about the four truths that currently shape what we call the “art market.” Now Carole walks us through the seven factors to take into account when considering the inclusion of art in an investment portfolio.
1: Long holding periods
If you’re counting on recovering your initial investment, be aware of the fact that there are long holding periods for works of art. This can be anywhere from 10 to 15 years. “Flipping” art is highly speculative and is only used among a small, savvy group of private dealers.
2: Lack of liquidity
There is a lack of liquidity in the market, including a high cost of getting into and out of market. A commission of 25% has to be paid at auction on the buyer’s side, and it can be sometimes be negotiated on the seller’s side.
Just like any other art form, paintings, sculptures, and prints are heavily affected by trends. Fads and fashion can significantly alter the value of a work of art at any point in time.
4: Limited quantity
The art market is not fluid, and there are only a limited number of works of art in any particular category sold at any point in time.
5: Uniqueness of the work
Fine art is unique and not interchangeable. Two works by the same artist, made during the same period, representing the same subject matter, and even the same size can command vastly different prices due to a difference in their quality, which is not quantifiable. Factors such as provenance and condition can also have a dramatic impact on price.
6: Not transparent
The market is not transparent. Less than 50% of artwork is sold at auction, where prices are recorded. The majority of works are sold privately, and no price information is available for the private sector. This makes it difficult to assess meaningful movements in the market.
It is extremely difficult to assess the value of work of art at any particular point in time, because of the fact that the indices that exists do not comprise all works sold. When trying to analyze indices (such as the Mei Moses Family of Fine Art Indices) in order to gauge art market performance, keep in mind that indices do not take into account transaction costs, and only consider art that has turned around twice in the marketplace.