Ever wonder what the top investors hold in their portfolios that you won’t find in the average financial plan? It’s one of the oldest and most exclusive asset classes. Fine art.
Ultra-wealthy collectors will go out of their way to employ entire teams of experts to acquire art for their portfolio, with price tags as high as $450 million! The returns on some of these paintings have achieved impressive multiples, but unless you’re in a small fraction of the 1 percent, you’ve never been able to access them.
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In this article, I’ll share a new way you can diversify your portfolio and get started making investments in contemporary art, without the millions of dollars it usually requires!
Investing in art
So, have you ever thought about investing in paintings by artists like Pablo Picasso, or what about Jean-Michel Basquiat or even Andy Warhol? I’ve thought about it, but always figured it was just too expensive, right? I mean, collecting art is for the ultra-wealthy. And for good reason. Many wealthy folks see art as an asset class that isn’t correlated with the stock market. In other words, it doesn’t matter what direction stocks are going … up, down, sideways, or whatever — usually, the price of art isn’t affected. Others see it as a hedge against inflation and inflation is all over the news these days due to everyone buying pretty much everything that’s for sale in stores, so prices are going up.
Inflation means your dollar doesn’t have the same buying power as it did before. With contemporary art, historically, its prices tend to rise along with inflation — like gold. And you know, you wouldn’t hang gold bars on your wall. A Madonna by Warhol, however, sure!
And art has done really well since the end of the second world war — over the last six or seven decades.
For example, some paintings were originally purchased for $21,000 dollars and sold for $110,500,000. Let that sink in a moment.
According to publicly available data compiled by Masterworks, from 1995 to 2020, contemporary art prices outpaced the S&P 500 by 174 percent. It’s also one of the top investments held by ultra-high net worth families. As you can see here in the graph, over this period, the S&P 500 appreciated 9.5 percent a year, while contemporary art prices appreciated 14 percent per year on average. That’s nearly two-fold the S&P 500 over the same period!
What if you don’t have millions to invest in art?
So how do you buy art if you don’t have $8 million or $10 million dollars to invest? Well, you can use a platform like Masterworks. Masterworks is the first platform for buying and selling shares representing an investment in iconic artworks from artists like Monet or Picasso. For example, if you’re looking to diversify about 5 to 10 percent of your portfolio, you can create an account and find one of their paintings in the marketplace, then buy shares on the platform that represent a fraction of the value of the artwork itself.
But how risky is it to invest in art?
All assets gain and lose value at any point in time.
According to a 2020 report by Citibank, art has one of the lowest correlations to the stock market of any major asset class. And Deloitte estimates the total wealth held in art to be $1.7 trillion. For the first time, you can invest in this exciting asset class.
But, with contemporary art, including artists like Picasso, Monet, Warhol, and so on, from 1995 to 2020, contemporary art prices have faced losses only 8 percent of the time, measured over two-year investment horizons. And that loss would be an average of just 0.5 percent. Compare that with potential losses in U.S. housing at 20 percent or the S&P 500 total return at 24%, and it’s easy to see that contemporary art is a very interesting asset class.
So how does it all work?
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First, Masterworks sources paintings and commits capital to buy them. Masterworks uses a proprietary data set to understand which artist markets are accelerating the most quickly and provide the best risk-adjusted returns. As an investor, you can access this database on their platform to do your own research. Once Masterworks decides which artist markets are appreciating, they locate and acquire the best pieces available either at auction or private sale to offer to their members.
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Then, Masterworks files an offering circular with the SEC to offer it publicly on the masterworks.io website.
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Then, investors like you and me can invest in the painting by buying shares.
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For U.S.-based investors, there is a secondary market available where members can offer their shares for sale or offer to buy shares of previous offerings.
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And finally, sometime in the future when Masterworks sells the painting, each investor will get a proportionate amount of profit or loss, net of all applicable management fees. For example, their first and only Banksy sale resulted in a 32 percent annualized return net of fees to their members. And remember, past performance isn’t an indicator of future performance, so there are no guarantees it will happen again.
But, as investors, past performance is often the clincher. After doing our due diligence, ensuring the investment is right for us, we almost always look to the past performance as an indicator of whether or not we could make money.
Investors can get started investing in art through Masterworks with as little as $15,000. However, if that kind of investment is too large for your portfolio, they reserve the right to lower that on a case-by-case basis. And, you don’t need to be an accredited investor either.
The target holding period, according to Masterworks, is three to 10 years. However, U.S.-based investors can try to sell your shares on the secondary market, but there’s no guarantee that another member will choose to buy them. It’s always dependent on demand.
Initial Art Offering
Alright, so when Masterworks buys an art piece that they are going to sell, it’ll be offered on their platform as a current offering. This is somewhat similar to an IPO for a company that’s going public.
In this example, they have an Agnes Martin. Prices for similar works by Agnes Martin have appreciated 14.3 percent a year on average, and there are more than 38 years of auction history. Thirty eight years is a long time, considering many public companies haven’t even been around that long. For example, Google was founded in 1998, nearly 23 years ago, and Facebook was founded in 2004 — just 17 years ago.
And if you click on “Similar Sales,” you can see that Martin’s paintings were purchased for thousands and eventually sold for millions.
Once you’ve decided that you want to make a purchase, you can buy as little as one share. Shares are usually $20 in an offering. It doesn’t matter if the value is $1 million or $50 million, the share price is $20 to start. What differs is the number of shares available to be bought.
So what can you do with your shares after you’ve bought them? Well, like many other shares, you can either hold them or sell them. Or buy more. And one of the cool features of the platform is that investors can buy or sell their shares in a transparent, secondary market. But remember, there’s no guarantee that you can sell your shares — there has to be demand. And demand can be seen on the buy-side of the trading platform.
Secondary Market
Here, you can see the trading platform is divided into sell orders and buy orders. These orders represent what others have initiated.
For example, if you wanted to buy a George Condo, you could buy this one for $22.53 a share. And here, you see there are 25 shares available.
Similarly, if you wanted to sell your painting, you would list it for sale, and choose how many shares you wanted to sell, and set the limit price. The limit price is the minimum you’d accept for your shares.
At the time of this recording, the secondary market is only available to U.S. citizens with U.S. bank accounts.
Fees
What about the fees? Masterworks’ fees are 1.5 percent per year in equity in the painting, and 20 percent on any potential profits. In exchange, you get experts that research, buy, insure, store and eventually sell the art. The fees also cover the general costs of doing business, such as administration, appraisals, regulatory filings, and so on.
Due Diligence
Masterworks offers a lot of information for investors like you and me to do their due diligence. You can type in an artist, say, Andy Warhol, and you’ll get some useful information. For example, this artist had over $228 million worth of paintings sold in 2019 — well, that’s from the auction houses. In one example, a painting was purchased for $46,200 and eventually sold for $4.1 million after 28 years. Now, you might be wondering if you really have to hold on to your investment for 28 years, and the answer is no. You can always sell your shares on the secondary market. Masterworks also offers useful research for you to read, for example from Citibank and Deloitte.
How is it taxed?
You might be wondering how you are taxed when buying or selling these art shares. Well, it depends on a case-by-case basis, but Masterworks is structured as a pass-through entity. When the painting sells, you will receive a distribution, and if the amount exceeds your cost basis in the shares, it will be taxed as dividend income. No matter what, investors should consult their tax advisor.
Final Thoughts About Investing in Art
Masterworks has a platform that offers investors the ability to invest in art. They are the only one dedicated to this asset, which is rather surprising to me. But, hey, it seems they have all their bases covered. And to me, it seems like an easy way to both invest in contemporary art, and brag that you own an investment in it!
This article originally appeared in The Financially Independent Millennial and was syndicated by MediaFeed.org.
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Investing in precious metals
Precious metals have held a place in human culture for thousands of years as currency, decoration and industrial materials.
Think of the treasures in King Tut’s tomb, gold bars at Fort Knox, or platinum in the catalytic converter of a Prius.
Investing in precious metals can also play a part in building a portfolio. Here’s a look at what to know before investing.
Related: Effective investing as a couple
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Precious metals are naturally occurring elements that have a high economic value. Generally speaking, the term refers to gold, silver and platinum.
You may also hear talk of the platinum group, which are metals that are chemically similar to platinum and include palladium, iridium, osmium, rhodium and ruthenium.
Precious metals are rare, and only a small amount is mined each year, which helps drive their high price. Consider gold: About 2,500–3,000 metric tons of gold is mined each year, while just over 190,000 metric tons have been mined over the course of human history.
That sounds like a lot, but compare that to the 160 million metric tons of bauxite — one of the primary sources of aluminum — that’s mined each year, it’s just a drop in the bucket.
If you think gold sounds rare, consider platinum: Only 190 metric tons of platinum comes out of the ground each year.
Silver is by far the most common of the three major precious metals. In 2018, nearly 27,000 metric tons of silver came from mines around the world.
Here’s a closer look at each of these metals and how they are used.
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When thinking of precious metals, gold may be the first to come to mind. For centuries, its been prized for use as currency and for jewelry making. It also has a number of unique qualities that set it apart from other metals.
It doesn’t corrode, it’s highly reflective of light and heat and it’s extremely malleable. In fact, gold leaf can be pounded to 0.18 microns thick, or seven millionths of an inch. Gold is also a very good conductor of electricity, and because it doesn’t tarnish, its conductivity outlasts other common conductors, namely copper and silver.
About 78% of the gold mined each year is destined to become jewelry. Another 10% is used industrially, including in electronics and for medical and dental purposes. The rest is used to supply financial transactions.
Gold is the most expensive precious metal. As of early 2020, the price of gold was hovering around $1,293 an ounce.
DepositPhotos.com
Thinking about silver may conjure images of fusty tea services or ornate tableware. But like gold, silver has a long history as currency, and a number of its attributes make it an important industrial material.
It’s also malleable, which makes it a good material for jewelry making and industrial purposes. And it’s an excellent conductor — as a result, many consumer products, such as computers, mobile phones, appliances and automobiles, contain silver.
Silver is even starting to show up in some unexpected places. For example, radio frequency identification (RFID) devices, which use sprayed-on silver, are replacing barcodes on items like supermarket goods, packages and warehouse inventory.
Silver is the cheapest of the precious metals. In 2020, an ounce of silver cost about $15 an ounce.
alexis84 / istockphoto
By far the rarest of the three precious metals, platinum is primarily mined in three countries: South Africa, Russia and Zimbabwe. Like the other precious metals, platinum is used for decorative and industrial purposes.
It is the least reactive material known to man, meaning that, like gold, it doesn’t corrode. It is also extremely malleable and a good conductor of electricity. Industrially, platinum is used in the manufacturing of everything from fertilizer to sticky notes, and it’s used in catalytic converters in automobiles and fuel cell technology.
Because it’s nonreactive and nontoxic, it’s an important material in a number of medical devices, including joint replacements and pacemakers.
Despite its relative rarity, the price of platinum comes in under the price of gold. An ounce of platinum in 2020 cost about $900.
allanswart / istockphoto
There are a number of strategies investors can take to get started investing in the precious metals market, from buying the materials directly to more indirect methods like investing in mining companies.
Here are some options to consider.
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When buying bullion investors are buying precious metals in their physical form, as bars or coins. Bullion is often bought and sold on the commodities market, but it can also be purchased from precious metal dealers, brokerage firms, coin dealers, or major banks.
The U.S. Mint produces gold, silver and platinum bullion and guarantees its precious metal content. Common bullion coins include the American Gold Eagle, and internationally, the Canadian Maple Leaf, the Australian Gold Nugget and the South African Kruggerand.
Before buying an investor might want to shop around for sources with the lowest markup. Banks might charge less than dealers. Ask for a coin’s melt value, which will tell the actual value of the metal used to make it. And always be sure to have a secure place to store purchases, such as a safety deposit box.
jansucko / istockphoto
Rather than buying physical bullion, investors can buy shares of precious metal ETFs much like they would a share of stock.
Commodity ETFs invest in physical commodities, such as agricultural products, petroleum, or, in this case, precious metals. These ETFs may track a single commodity or a commodity index. Commodity ETFs may also make use of sophisticated investment strategies such as futures contracts.
iQoncept / istockphoto
Investing in stock from mining companies can give investors indirect access to precious metals. The stock price of these companies is tied to the price of the metal they mine. The stock price of a gold mine might rise with the price of gold and fall as the price of gold falls.
When buying stock, investors must understand that price performance may also be tied to the underlying management and performance of the company.
If something goes wrong — say a mining disaster destroys equipment — the stock price might diverge from the price of the metal. In this case, even if precious metal prices are on the rise, stock prices could tumble.
As is the case whenever buying stocks, investors should also be aware of other potential pitfalls, such as trying to time the market. In other words, be wary of jumping in too quickly when prices are soaring, or jumping out when prices fall.
Instead, when choosing stocks, evaluating them, and determining how long to hold them, an investor might want to consider them in light of their overall portfolio and goals.
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These are derivatives, meaning they derive their value from an underlying asset — in this case precious metals. Futures contracts are an agreement to buy or sell a specific amount of a commodity at a set price and on a set date.
A futures contract can mean that an investor ends up holding the physical commodity. Options, on the other hand, give investors the right to buy or sell a commodity at a given price and at a certain time. However, the investor is not obligated to do so.
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This is a way to access the benefits of owning physical metals without having to store them. The certificate is a promissory note that can be exchanged for a certain amount of bullion stored in a bullion bank.
However, there are some drawbacks with this type of investment. For one, there may be no guarantee that there is enough bullion to back a certificate. In other words, the bullion may not actually exist.
There is also no way to check whether the precious metal content is what the dealer says it is, and it may not be properly insured.
VladK213 / istockphoto
Before investing, investors might want to be sure they thoroughly understand the types of investments available. Stocks, ETFs and futures/options contracts are regulated by the federal government.
However, not all purchases of precious metals are regulated, and fraud can be an issue. The Federal Trade Commission suggests consulting with a trusted financial advisor with specialized investment knowledge in precious metals trading to help investors determine the best type of investments.
When buying gold coins or bullion, research dealers thoroughly. Investors might look them up online and read about other people’s experiences with the company. The state attorney general’s office or local consumer protection agency could be other avenues to find out whether there have been any complaints against the company an investor is researching.
Investors also might want to be extremely wary of sales pitches that encourage them to “act now,” sellers that appear to minimize risks, or buying bullion that won’t be delivered directly.
Also, beware of dealers that allow you to buy on margin, i.e., borrowing money to buy precious metals. Such dealers must be registered with the Commodity Futures Trading Commission.
If they are not, they could be operating illegally. Any dealer selling a commodity on credit or margin must deliver the material to the buyer within 28 days of purchase.
Potential investors could run a background check on anyone trying to sell precious metals by looking them up on SmartCheck.gov to find out whether the person or company is registered.
Finally, if anyone is actively trying to sell precious metals, investors could watch out for these tell-tale signs of fraud:
• Guaranteed returns
• Being pitched a financing agreement
• Cold-calls or cold-emails
• Scare tactics — For example, being told that gold is the only material that holds its value in times of upheaval or that precious metals are about to reach their highest value in recent times
• Sales agreement that doesn’t say where the physical metal is located
DepositPhotos.com
Investors hold precious metals for a number of reasons. First, they tend to hold their value when other currencies don’t. Most currencies are fiat currencies. The paper money and metal coins used as legal tender are backed by the government that issues them.
In other words, they have value because governments say they do. Governments can always print more money and mint more coins. Yet if people lose faith in the currency, that currency can lose value. On the other hand, the amount of precious metals in the world is finite.
As a result of their scarcity and their industrial uses, precious metals have an intrinsic value. And as investors lose faith in a currency — during times of political or economic upheaval, for example — precious metals may maintain their value or even rise.
Similarly, because precious metals don’t derive their value in the same way as paper money, they can also be used as a hedge against inflation. As inflation rises, investors tend to flock to stable investments like gold and silver, driving up the price.
Oat_Phawat / istockphoto
Though investors may fall back on precious metals in times of instability, it’s important to understand that they can also be subject to risk and volatility.
First, a weak U.S. dollar relative to other currency can push precious metal prices higher. That’s because as the dollar falls, gold becomes cheaper to buy with other currencies. Conversely, a strong U.S. dollar can push precious metal prices lower as it becomes more expensive to buy with other currencies.
Volatility in the broader market can also affect precious metal prices. As stock price drop, investors may look for alternatives, turning their attention to precious metals.
It may sound counterintuitive, but during times of economic stability, the price of precious metals may fall. Remember, these commodities are often used as a hedge during times of instability. So when things are going well, fewer investors may be interested in them.
SlavkoSereda / istockphoto
Precious metals maybe a useful way to diversify your portfolio. Yet because they can be volatile, you might want to make sure they fit your goals and your risk and return profile before you invest.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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