When advising a client, who wants to build an art collection as his/her main investment, it would be important to stress the risk involved in art investment. Since the nineteenth century, art dealers have been advising clients to buy art they enjoy. This is the single, most important element of collecting because if a piece loses its market value, the collector still has a personal attachment to it. Buying what you love is the safest way to invest in art. Building a collection from a pure investment standpoint creates an entirely different set of issues. Some economists suggest art investment can be more lucrative than the stock market, but the mercurial trends and volatility of the art market can make art a much riskier asset than a stock.

Hedge fund managers like Steven A. Cohen have created a heightened interest in art as investment. As a collector, he has generated an interest in certain artists and a confidence in the larger art market.¹ It is suggested that his attention to certain pieces has validated the value of similar artists and for art for the entire market itself. But whether or not the high prices paid for his collection will turn into a profit for him is yet to be determined. He purchases recognizable pieces by famous artists for high prices. At this point he seems more of a traditional collector, who buys what he likes, rather than what will provide him the most long-term profit.

Economists like William Goetzmann, David Kusin, and Michael Moses have conducted studies to evaluate the gain for a collector who wants to use art as his/her main investment. They attempt to compare the gain from stocks versus that of art. By analyzing works of art that sell more than once at auction, Goetzmann says that the rate of return for art exceeds the rate of inflation.² But the cost of selling works of art is very high, therefore cutting into the profit. Also, the likelihood of a buyer willing to pay as is highly unpredictable, even with reliable auction records. Unlike stocks, art is not a liquid asset. Unlike a stock, that reflects the value determined by a large group of people, art is determined by individual taste. The selling price of a piece at auction is determined by the mood or taste of one or two, single bidders --- rather than thousands of shareholders.

In her article "Art as an Investment," Wendy Cromwell discusses the difference between art investment funds and traditional collectors. She says, "Individual collectors are driven by passion, . . . informed about auction history, and they consider provenance and condition as important variables in determining what to pay for a work of art, whether privately or at auction." Collectors are usually well informed about the artists they collect and which pieces will hold their value. They do not simply speculate on profitable piece but they assimilate a variety of factors into their buying methods.

Many art investment funds try to diversify their collection in a similar format as a stock portfolio. This model has worked for funds like the British Rail Pension Fund who make a profit of almost 12% by slowly selling off work from a variety of genres.³ Other investment groups, such as the Fine Art Fund, are following the same model. This may work against them in art investment, as it is often more important to have a cohesive vision in a collection than a variety of art objects. Investment funds often try to collect iconic works by famous collectors, rather than pieces they love, to insure their financial gain. This is another risky move. As Cromwell suggests, the provenance of a thoughtful collector's vision often adds value to its marketability. A random selection of paintings that is sitting in a vault might be viewed negatively, as commodities, rather than unique pieces of art.

Although one can research auction records through a database like the Mei/Moses Index, the auction market is difficult to gauge. Moses says, "The S&P 500 and the Dow 30 are broad measures of how those markets are doing. We need the same thing for art." But galleries do not report such data, making art investment much less documented than the stock market. Also, in an auction, a piece that sold for a record-breaking price might not actually be worth that price. The value can be constructed by a set of collectors who falsely bid up the price in order to insure their own interests in the artist. The results can also be based on the group or mood of the bidders rather than concrete, reliable data. Thus, a collector cannot insure that their piece of art will sell for its predicted price.

In Finken's article Goetzmann also sees a discrepancy between the stock market and the art market in terms of a public marketplace. Unlike the visible, transparent public realm of the stock exchange, art buying is most commonly done in private. The choice of pieces is often minimal and collectors must rely on dealers and specialists in order to invest. This corners the market and makes art investment narrow.

For a collector Moses suggests buying lower-priced art, with more room to grown, rather than million-dollar masterpieces. Contemporary art is very risky because of its reliance on ever-changing trends. Kusin suggests American and English furniture as a solid investment. When asked what he would invest in, Kusin would buy modernist drawings and sculpture maquettes in an attempt to build a strong, cohesive collection. Although there was a decline in its value in the 1990s, Goetzmann says prewar and postwar art is a good investment because the works are "high beta." The genre swings both upward and downward in value with great magnitude. It is risky but has great potential for profit.

According to these economists art investment can be lucrative but riskier than stocks. Art collecting has to be done in a strategic manner, as there is less security and proper data in the art market than the stock market. If advising a advising a client, who wants to build an art collection, it is best that art should make up a portion of one's investment rather than serve as his/her main investment. Art should also be held for a long period of time. Although a collector can now use art as collateral for a loan from companies like Art Capital Group Inc. or Citigourp Private Bank, they should be well informed about the market. It might be better for a collector to enjoy a panting on their walls instead of putting it into a warehouse for ten years. Therefore, the traditional model of art collecting still functions best. Collectors should buy what they like rather than what seems to be the best investment.

¹ Landon Thomas Jr. and Carol Vogel. "A New Prince of Wall Street Uses His Riches to Buy Up Art." The New York Times, March 3, 2005
² Jori Finkel. "Painting by Numbers." Art and Auction, April 2004. Pp. 77 - 83
³ Wendy Cromwell. "Art as an Investment." Art on Paper, March/April 2005

by Alissa J. Anderson, Anderson Shea Art Appraisals