How To Start 2025 As An Art Collector--Part 2: Budgeting & Investing
Make your art collecting dollars work for you
Image: June Edmonds, Grand Adage, 2024.
In the first article in this series, I talked about the mindset shift you’ll need to make in order to start collecting. But one of the biggest questions on people’s minds tends to be, Now that I’ve decided to collect art, what’s it going to cost me? How much should I plan to spend?
Don’t worry: The answer is NOT "as much as you can". A better answer is “as much as you feel comfortable spending,” but even that’s not really helpful.
Putting art collecting in perspective
Art collecting is a hobby, something you may come to love doing. It can be a part of your life, but it has to be put in perspective. If you’re like most people, other things necessarily take priority. First, assess your situation: You have commitments to your family, job, and friends. You’re part of multiple personal and professional communities. You may (and should) also have other investments such as stocks, bonds, real estate, a 401K, etc. Is travel a priority for you and your partner? Are you (or do you anticipate) caring for an aging parent in the near term? Your art collecting needs to fit into an overall picture of your life.
Taking this perspective can lay the building blocks for disciplined collecting. In turn, this helps new collectors not feel overwhelmed by the choices they’re confronted with at the beginning of the collecting journey. One immediate filter you can impose on yourself is determining a budget and sticking to it. Let’s dive in.
So what’s the magic number?
Typically, I tell new collectors to allocate between 3-7% of their overall household income to art purchases. Some of my colleagues even suggest a maximum of 5%. Using the former range, that means if you bring in $150,000 annually, you’ll set aside $4,500 to $10,500 for art. And remember, that’s your budget for the year.
This is a good rule of thumb because you’re not over-indexing in art versus your overall budget. Early in your collecting journey, one of the things you’re trying to figure out is whether–and how much–you like art and the process of acquiring it. To find that out, you’re going to spend some real money and have that experience. So by following this rule, you’re not risking the money you need for your living expenses. Art collecting must be understood as an extra.
Art as part of a diversified investment portfolio
Any discussion of buying art inevitably leads folks to the question of the extent to which they should think of art as an investment. Yes, art is an additional means of diversifying your investment portfolio. First, art is a store of value, i.e., it’s an asset that maintains purchasing power into the future, and that value can be saved or retrieved reliably in the future. Second, art is a tangible asset. This means that, unless you’re buying a digital piece, art is something that you can see and touch. Most importantly, an attractive feature of art is that, unlike stocks and bonds, art is not affected by the volatility of the financial markets, which means it can balance out your portfolio. In fact, a 2020 art market report by Masterworks and Citi concluded the following:
…the broad art market has exhibited low or flat correlation with the other asset classes. These include real estate and commodities, which like art, are tangible asset classes. Indeed, art's strongest positive relationship is with cash, and even then it is only a modest 0.26. Given these relationships, we can say that adding broad art market exposure to a multi-asset class portfolio could potentially improve diversification.
That said, if you look at your investment portfolio, a rule of thumb is to diversify in the following manner:
Yes, I know that if you max your allocations according to the chart, it adds up to more than 100%. That’s why the above chart is a great starting point for a conversation with your financial advisor, who’ll have expertise that I do not and can take into account your particular risk tolerance levels. Onward.
Additional considerations
Are there any “cons” to investing in art? Yes. Go in knowing that art is not a liquid asset. You can’t quickly exchange it for cash. Selling a piece of art isn’t as easy as logging into an ETrade account and clicking your mouse a few times to sell stocks. You’ll need to involve an art dealer or auction house, who will first appraise its current market value. If you work with an auction house, you’ll need to wait until they have an appropriate auction that your work can be included in. You’re probably looking at several months.
Also, don’t rush into art because someone tells you it “always out-performs the S&P500” and shows you a chart that looks something like this:
Source: Artprice.com
Let me put you up on game: This chart is based on a hypothetical basket of art that’s comprised of 100 blue-chip artists. Folks with names you’ve probably heard of: Warhol, Picasso, and Basquiat, among them. Blue-chip art prices tend to start around $1,000,000. Moreover, what factors in this chart are the performance of the works on the secondary market, i.e., when the works come up for auction. Also, know that there’s scarcity among blue-chip artists: Most are dead, which means they’re not producing any more work. Limited supplies drive up prices.
For example, take a look at the value of late Microsoft co-founder Paul Allen’s art holdings. Notice his holdings tended towards the blue-chip:
Source: MyMoneyBlog.com
It’s increases in the value paid for artists like the ones in the above chart that give art its perception as a outperforming the stock market(s).Bottom line: Don’t get gassed up by looking at charts that reflect the buying and selling habits of high-net-worth and ultra-high-net-worth individuals–which is what industry benchmark reports such as the annual UBS Art Market Report (2023’s is here) reflect–unless you’re one of them.
This is not to dissuade folks who aren’t wealthy from investing in art. Rather, it’s to manage expectations. If anyone tells you that art always appreciates, they’re lying to you. No one knows.
Can art appreciate in value? Absolutely. Is the art you buy going to increase in value? That depends. Unlike stocks, art is subjective. The value of a piece of art is determined by many factors, not least of which are the artist’s career stage, the type of work, the size of the work, the gallery that’s representing them, who else is collecting them, and what price it could reasonably bring if it came to auction. This is why it pays to work with professionals who can help you understand the opportunities that you’ll encounter.
Take the long view: Don’t be a flipper
Because of its subjective nature, I recommend against buying art to flip, i.e., to make a quick buck. Yes, there are speculators in art, but I’d recommend you not become one of them. You’re increasing your risk exposure significantly.
Rather, buy art that you love. Buy pieces that you can see yourself looking at every day, since they’ll be in your home or apartment. And once you’ve done that, expect to hold onto your art for at least three to five years, if not longer. Most collectors hold onto works for 20 years on average.
Artists take time to develop, especially if you’re buying emerging artists who don’t have an expansive body of work. Yes, you fell in love with a piece at a gallery exhibition and bought it. That artist will probably not have another show at that gallery for another 12-24 months (at least), during which time they’ll be creating more work. Hopefully, they’re using that time to deepen and enrich their practice so that their new body of work shows growth. Also, in those intervening months and years, the gallery is working to place the artist’s work with museums and other prestigious collectors. Your job as a collector is to make choices that are smart and meaningful for you. After that, all you can do is sit back, enjoy your art, and wait.
Last words
Once you’ve figured out your art budget for the year, stick to it. When you’re talking to gallerists and your art advisor, let them know what you’re working with. That way, they won’t point you to work that’s way outside your budget. A good advisor, in particular, will remind you when you’re getting close to the top of your budget. From there, you can decide if you want to make an exception and go beyond your initial allocation. But don’t make that a habit. Be a disciplined buyer early in your art-collecting journey. After all, there’s always going to be another amazing piece of art that will catch your eye. Collections are built over years and decades. Having a good perspective on your art budget and where art fits into your overall portfolio will serve you well in the long run.
And that’s the game smart collectors play.
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