Art Pros & Cons

Reuters India takes the occasion of the Indian Art Summit to come up with some guidelines toward viewing art as an investment. Here are their pros and cons followed by two important warnings:

1) Uncorrelated Returns: Experience from the Western markets has shown that the Art market is generally uncorrelated to the performance of the stock market or the returns offered by investing in government bonds.

2) Lack of Liquidity: If you are in need of cash, it’s going to be hard to immediately convert a sculpture or painting that you own into cash. However, if you owned a mutual fund, you could sell it and get cash in hand within 24 – 48 hours..

3) Lack of Income: Usually the Art you own is not going to generate any regular periodic income for you, unlike say receiving dividends from stocks or interest from bonds.

4) Fakes and Regulatory Framework: The Art market is not immune from fraud, in fact every year one reads about fakes of even famous artistes. Just earlier this year, there was the case of an Indian artist’s work that turned out to be fake, yet was displayed by a well-reputed gallery.

5) Transparency: Why does art get priced the way it does? Well, the short answer is its difficult to tell. Sure there are supply and demand issues involved and how popular a certain artist might be.

6) Handling Costs: When you buy stock or bonds, you are buying a financial asset and get only a certificate which is easy to store. You don’t need to insure this certificate or protect it against fire or flooding.

Like all things in life, you need to focus on the basics first. You need to walk before you can run. Similarly, when it comes to investing, make sure that you get the basics in your portfolio right before you venture into Art investing.

a) Fulfill your “Foundation Goals” first: Before you get to “Lifestyle Goals” its important that you have adequately taken care of your basic goals such as your housing, protection (insurance) and family needs (education, marriage).

b) Build a strong foundation in your portfolio: Just like a house with a weak foundation is risky, so too is a portfolio that is built on shaky investments. Your investment portfolio should be built on high quality mainstream assets and not alternative investments like say antiques, fine wines, or Art.