Thursday, June 30, 2005

Investing in Art: Doing the Math

There's a fascinating debate going on over at The View from the Edge of the Universe. Atlanta-based collector and blogger Erik Schneider (whose blog I just discovered but am a big fan of already) decided to compare the return on investing in art versus investing in mutual funds. Unlike other stories on such comparisons I've read, though, Schneider actually shows his work (Excel spreadsheet). He gave himself $100,000 to invest in mutual funds and the same for what he terms "investment grade artwork" (i.e., "artwork by artists with a substantial auction history"). His results were as follows:

Sell in 5 years and net:
Mutual Funds: $136,239
Art Portfolio: $ 95,535

Sell in 10 years and net:
Mutual Funds: $185,609
Art Portfolio: $141,841

Sell in 15 years and net:
Mutual Funds: $252,871
Art Portfolio: $208,412

Sell in 20 years and net:
Mutual Funds: $344,508
Art Portfolio: $306,225

Sell in 25 years and net:
Mutual Funds: $469,353
Art Portfolio: $449,945

Sell in 30 years and net:
Mutual Funds: $639,440
Art Portfolio: $661,117
Schneider explained his overall assumptions about the art investment this way:

Only 90,000 of the initial $100,000 in artwork purchases actually go towards art. The other $10,000 goes toward sales tax, shipping, framing etc. Upon sale, you will net about 73% of the sales price, the remainder will go to commissions etc. (73% is about what you net selling at auction considering a 20% buyer's premium, a 10% seller's premium and 2% estimated out of pocket costs.) So where is the better place to put your money? The mutual funds beat the art portfolio if one sells at anytime before 27 years. After 27 years, the art portfolio beats the mutual funds.
One reader, however, has challenged his conclusions. Among the points the contesting commenter (aka ArtInvestor) makes are 1) Art does not compound; 2) most people start collecting art at a much later age (mostly in their 40s); 3) you're at a disadvantage unless you have an "inside edge" (e.g., "a Gagosian [or] a top art consultant"); 4) there are other costs with art (insurance costs, regular appraisals, cleanings); 5) mutual funds can be used as collateral for loans to help increase your wealth but it's very difficult to borrow money against your art assets, etc. I must say, ArtInvestor's arguments are compelling, but Schneider rejects and/or responds to most of them. Both seem to agree that only by being in the collecting game for the long haul are you likely to see significant returns verus other investment options, but both also agree that collecting has value beyond the merely monetary. Personally, I'll be dead before any of the prize pieces in my collection are sold, so it's all a bit academic.


Anonymous crionna said...

Edward, what type of sales have you seen for artists whose work has begun to fall out of favor? Is there a rush to sell or are the pieces kept 1) in the hopes that it's value will rebound and/or 2) the owner likes having the work(s) around despite their falling value?

I've always been a bit ticked off at the stock market (depsite the fact that there is no denying it's ability to add value to a protfolio over the long term) because the brokers make money whether the market is going up or down. SO, while things definitely look good when things are on their way up, eventually, a correction is good for the brokers in that they earn money during the sell off too.

Just wondering if there were a corollary in the art sales world.

6/30/2005 03:28:00 PM  
Blogger Edward_ said...

It kind of depends, from what I've seen crionna. I'm mostly thinking out loud here, in hopes of offering something helpful.

If you're wise and patient (especially wise), of course you can buy up the work other folks are desperate to unload when the art market corrections take their toll, and then just wait out the lull. But that's mostly effective with the aritsts who, as we say, are in the books already. For those newer artists who were enjoying the ride up, but not yet having secondary market success to secure their place in history, the thing to watch out for is that when the market turns down, they are forced to stop making art. This happens frequently. Moreover, watch if their galleries look like they're going to close. If they don't close, buy away (really, this is something to look for, undervalued artists in galleries that withstand the recession...they're positioned to do very well down the road generally). If they're gonna close, well, along with so many others closing, those artists often can't get into another one, and their career comes to a screeching halt. In those cases, it's probably best to only buy the work if you love it (which is always the case, but even more so then).

I know an artist whose career was really starting to take off in the feeding frenzy that was the art market of the 80's. He was later to the banquet than the others, but everything was looking very promising. But then two galleries representing him were forced out of business by the recession, and it took him about 11 years to find another gallery.

During the interim, he became very discouraged. His work that had sold to major collections in the 80's for the going rates at the time (some would say ridiculous) is most likely in storage, and in discussing one piece with a curator who inherited it recently, I realized it's gonna take this artist years to have the market connect the dots between his 80's art and what he's making now. In other words, that earlier art is very unlikely to appreciate. (We'll keep our fingers crossed about the work he's making now.)

Unlike brokers, only the very richest gallerists can outlast a serious art market recession it seems.

All of that is a long way of saying what I said at the beginning: it all depends.

6/30/2005 03:45:00 PM  
Anonymous crionna said...

I think that you answered my question just fine. Is sounds like sellers (you) don't prosper on the downtrend.

6/30/2005 04:07:00 PM  
Blogger Edward_ said...

sellers (you) don't prosper on the downtrend.

Only the very clever ones.

6/30/2005 04:09:00 PM  
Anonymous LA Artist said...

Really interesting. Thanks for sharing. And also thanks for the political commentary. Gentleness is greatly underrated in our times. I appreciate that quality in what you post.

6/30/2005 04:12:00 PM  

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