Picking the next Picasso

Why art is a risky investment By Michael J. Matty, CFA, CFP Chief Investment Officer St. Germain Investment management Special to PRIME As you spend the warm lazy days this summer perusing the local art galleries and art shows, you may begin to wonder if investing in art makes some financial sense to your portfolio. After all, who wouldn't love to acquire the works of a local artist who then goes on to fame (and brings you fortune). You dream of noteworthy galleries and big auction houses oohing and aahing over your keen ability in spotting the brilliant emerging artist, and offering veritable fortunes for the paintings on your living room wall. Could you pick a star? What are the odds? Well, unless you are incredibly lucky (and truly have developed the skills to spot a brilliant emerging artist), the odds are virtually nil. To be sure, it may be possible if you spend a considerable amount of time educating yourself about the art market, the artist, art trends, and so on. If you go through this educational process and have some luck, you may make a few dollars by investing in some paintings. But the education that you get may prove invaluable if you find that you enjoy this pursuit. In fact, the education and enjoyment that you derive from the pursuit of the artwork (and the piece itself) will likely be its own reward. As virtually any gallery owner will tell you, buy what you like, not because you are looking to make money. If you buy a painting to derive a lifetime of enjoyment from it, the resale value is a moot point. Can you afford the risk? But we digress. The article is not about art for enjoyment sake, it is about art as an investment. Arguably, art should be a good diversifier to your portfolio. It moves in different cycles from stocks, bonds, gold, or even real estate. So does it deserve a place in your asset mix? Unless you have very substantial assets, it is very unlikely that art should be a part of your investment portfolio. There are numerous reasons for this. First, the world of high priced 'investment grade' art is very expensive. A good portfolio would need to contain multiple artists and time periods, necessitating an investment of many millions of dollars. One or two paintings would simply not be enough to give you adequate diversification. A review of a large art collection sold at auction will typically reveal that very few of the paintings were responsible for a majority of the appreciation in the collection. But you never know up front which paintings those will be, so you need a diversified collection Second, art is a very long term investment. Time horizons for a respectable amount of appreciation may be decades. And when you do decide to sell, the sale of an expensive piece of art is not like a stock, where you simply call your broker and sell. Appraisals need to be updated, authenticity confirmed, auctions scheduled, catalogs printed, and other time consuming steps. Third, a diversified collection would demand a considerable amount of expertise (in addition to the money). And because there is very little to no regulation in the art market, it is truly 'buyer beware'. Of course, you can pay for the expertise, but the costs can add up very quickly in this market. Fourth, transaction costs can also be substantial. The auction fees, insurance, appraisal fees, and other costs can add up to a considerable sum. And unlike many stocks, bonds, or real estate, art typically produces no income to help offset these fees. Another way to invest in art If you truly believe that fine art is the way to go, it may seem as if there is no way for you to get exposure to this market. But there is a 'back door' play on the art market. Since the auction houses get a commission based on the value of the works sold, a rapidly rising market should benefit the auction houses. Perhaps stock in an auction house such as Sotheby's may fit the bill for you better than a direct investment in art. But remember, the auction commissions also fall in a poor art auction! Bottom line buy what you like So as you spend the summer browsing those local galleries and art shows, remember to buy what you like because you like it. If it is something you truly love, you will derive a daily pleasure from it. And this will eventually become a lifetime of appreciation, which is truly a phenomenal return on your hard-earned money. Column provided to PRIME by:St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800443-7624; web site:www.dgstgermain.com