Wealthy People Invest In Art, But Should You?
If a financial services company wants to "democratize" investing, run away
Here’s an easy way to avoid making terrible investments:
If a financial services company says, they want to “Democratize” any aspect of investing… RUN THE OTHER WAY.
Art is one of the more recent asset classes that has been “Democratized”. It used to be that owning a Picasso was a luxury reserved for the ultra-wealthy. But companies like Masterworks allow ordinary people to own fractional shares of world-class art.
But just because you can invest in art does not mean you should.
In this edition of Calling Financial Bull$hit, I explain why you should leave the art market to the billionaires and focus on more rational ways to grow your wealth.
Art as an investment: Here’s what the data says
The sales pitch for investing in art is simple and alluring. “Wealthy people own art, and now you can too.”
The trap people fall into is a classic case of “correlation does not equal causation.”
Wealthy people invest in art, but investing in art is not what created their wealth. Most people who invest in world-class art were already stinking rich before they bought their first painting.
Many of the ultra-rich who buy world-class paintings end up sticking them in a free port—think of a giant safety deposit box near the airport of a tax haven country— to save on taxes.
Companies trying to get you to invest in art will also show you lots of charts displaying how much certain paintings have increased in value over a specific period.
Let’s look beyond the pitch deck and ask, “Is art a good investment?”
This was one of the many questions asked in an extensive joint study from the CFA Research Institute and Cambridge University reviewing over a century of history in financial markets.
Here’s a chart from Chapter 5 of that study that shows the historical return of art, fine wine, stamps, and violins—referred to as “durable goods”— compared to stocks in the U.K. from 1900-2010.