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Art Investment: Is Art the Next Growth Asset Class?

art investment

There are two conflicting goals at play in every financial portfolio: growth potential and safety.

On the one hand, you want high-growth assets such as stocks in order to help the portfolio grow over both the short and long terms. But on the other, you also want to simultaneously balance those high-growth assets with “safer” holdings like bonds and even cash to protect the principal in the case of a downturn.

It's all about organizing your investment holdings as part of a greater whole, rather than piecemeal. It’s about structuring your portfolio in a way that stands the best chance of meeting your goals within your acceptable level of risk. And it’s about finding a balance that works for you as an investor.

This is all particularly important in times of economic uncertainty. While it’s impossible to predict exactly what will happen in the future, it’s clear that right now the story of the market is one of uncertainty.

For instance, at the start of 2019, a Wall Street Journal survey found that the change of a recession in the next 12 months was at its highest level in seven years, with 25% of the economists surveyed predicting a downturn.

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But that changed by the spring, with the International Monetary Fund declaring in April 2019 that these fears of a recession were overblown and the global economy is more likely to grow into 2020.

For investors, this all proves that we still don’t know what we don’t know.

Rise of the alternative assets

This also makes it a great time to look into alternative investments like private equity funds, commodities, hedge funds, collectibles and more.

These asset classes are typically not correlated to the broader markets, meaning they’re protected from the wild swings of the stock market and are better able to deliver positive returns in the event of a downturn.

The truth is, over the past 20 years alternative investments have outperformed more traditional asset classes like stocks and bonds. In fact, since 1999, an alternative portfolio has generated slightly higher long-term returns than equities, fixed income or a traditional 60%/40% split of the two, according to Invesco. At the same time, alternatives were much less risky than the other options.

For this reason, alternative investments are becoming increasingly important as tools for everyday investors to grow their investment returns while simultaneously protecting their portfolios.

And these assets can be quite powerful. Yale University famously committed a large portion of its endowment to alternative investments in the 1980s and has to-date seen industry-beating results. In 2014, for instance, Yale’s endowment posted returns greater than 20%.

Art, the ultimate alternative asset

What about art?

The fact is, art is the ultimate alternative investment, as it is completely non-correlated to the public markets and has delivered consistent positive returns over the decades. This even applies during downturns. While the S&P declined by 5.1% in 2018, the art market returned 10.6% and was called “the best investment of 2018” by the Wall Street Journal.

In some regard, buying a work of art by a particular artist is akin to buying stock in a company, where blue-chip artists and companies share two key attributes: high-quality and assured liquidity. But there’s a marked difference in performance.

Comparing the ArtPrice100, an index which considers at the most important artists selling at auction, to the S&P 500 over the last 18 years, the art side has actually outperformed the stock market by an astounding 250%!

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Think about what’s happened in that time. The dot-com bubble, the 9/11 tragedy and it's market impact, the 2008 financial crisis… art weathered it all as a growth asset.

Why?

In part, it’s due to a supply that will never meet demand. So-called “investment grade” art, which carries six-to-eight-digit price tags and has a deep collector base, is very predictable — the artists in this category are often household names, attract a wide array of collectors, and typically have a track record of achieving high, if not record-breaking, auction sales.

And they aren’t making any more of it. Da Vinci and Picasso haven’t been producing any new works for a while, and they never will again. That fact only helps to further drive up demand and prices.

Art may not be the first asset class most investors think of when considering stock market alternatives, but it may well be the most reliable and lucrative over the long haul.

Want to learn how to invest in art? Masterworks is the first company to allow investors to buy shares of great masterpieces by artists like Picasso, Monet, and Warhol, similar to the way investors purchase shares in public companies.

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