Why Art is the Next Breakout Asset Class

No matter when the next downturn comes, savvy investors are already finding great returns and portfolio safety in an often-overlooked asset class: art.

Is your portfolio prepared for the next big stock market crash?

If you’re like the majority of investors out there, it probably is not. That’s because, more than a decade into this bull market, it’s become all too easy to become complacent, to assume that returns will always be there and that a traditional portfolio of equities and bonds will offer more than enough safety to weather any coming storm.

But that’s just not true.

Yes, global equities are up 10%-20% through the middle of 2019, and since the 2008 crash the S&P has grown nearly 3x, but there are warning signs on the horizon. Remember, markets took a nosedive at the end of 2018, and all of the gains so far this year have only got us back to even with where we were last fall.

What’s more, the experts are starting to worry. At the start of 2019, a Wall Street Journal survey found that the chance of a recession in the next 12 months was at its highest level in seven years, with 25% of the economists surveyed predicting a downturn. By June, those fears had only multiplied, with more than 60% of business leaders surveyed by the National Association for Business Economics expecting a recession in 2020.

Whatever happens, investors today are facing new uncertainties about global trade, future returns, and more.

But there is a solution: art.

It’s true. While the S&P declined 5.1% in 2018, the art market returned 10.6%, and was called “the best investment of 2018” by the Wall Street Journal. Why is art so powerful as an asset class?

It’s noncorrelated: Asset correlation measures how investments move in relation to one another. At the most basic level, assets that move in the same direction at the same time are considered to be highly correlated, while those that go in opposite directions, with one going up when the other goes down, are considered to be negatively correlated.

When building a diversified portfolio, it’s important to include assets that are not correlated to the overall market in order to provide protection in the case of a downturn. The way to do this is by including some non-correlated assets, or those that are entirely isolated from the stock market, in your portfolio.

Art is the ultimate non-correlated asset. Whereas stocks can be very reactive to day-to-day news and swings, the art market is far slower to move, continuing to appreciate at a slow and steady pace no matter what the broader market does. 

It’s resilient: The fall of 2008 was a dark time for world markets. Fresh on the heels of the unwinding of the subprime mortgage market, the collapse of investment bank Lehman Brothers in September 2008 turned a run-of-the-mill stock downturn into a full blown global financial crisis. That year, the S&P 500 fell by more than 37%.

Through this period, however, the art market was far more resilient. Yes, prices fell, but they were quick to rebound, despite the long hangover that dogged stocks for years. Based on MeiMoses, the leading art index at the time, from 2007 to 2009, auction prices fell by roughly 27.2%. Meanwhile, the S&P 500 fell 57% from its peak and hit a 12-year low in early March 2009. Through all this, art remained strong. In February 2009, for example, just five months after the collapse of Lehman Brothers, the sale of fashion designer Yves Saint Laurent’s collection brought in a record-breaking $483.8 million.

It’s global: Unlike most stocks and bonds, which are limited to the U.S. and other countries where those assets are traded, art is a global commodity. It can be bought and sold between collectors and investors anywhere on Earth, making it a truly worldwide market. Access to this large pool of potential buyers insulates the art market for country-by-country economic concerns and ensures a steady stream of new investment.

It’s in demand: As financial markets began to unravel in 2007 and 2008, demand for fine art soared to new heights. For instance, in 2005 roughly $630 million dollars flowed into the market for paintings sold at auction for $5 million or more. In 2008, however, the value of these masterpieces changing hands at auction nearly quadrupled to a record-breaking $2.2 billion. 

And this hasn’t slowed down, either. By 2012, the market was already ahead of its 2008 peak and continued to grow to new heights, achieving a staggering $4.2 billion record for sales in 2015.

It outperforms the stock market: Plain and simple, art did better than stocks in 2018. While the last year was sharply volatile for most parts of the public market, the art market in 2018 looked remarkably similar to prior years. 

On average, the art asset class posted returns of 10.6%, versus a 5.1% total return for the S&P 500, according to the Wall Street Journal. 

With these advantages in mind, Masterworks has become the first company to allow investors to buy shares of great masterpieces by artists like Picasso, Monet, and Warhol. For too long, access to these blue-chip art investments have been limited to the ultra-rich and connected. 

No longer. Through fractional ownership, Masterworks has opened the door to top-tier, blue-chip art investments to everyone.

Brian Meiggs
Brian is the chief editor of Finance Write and is a personal finance expert who has spent the last few years writing about how Millennials can make smarter money moves. He has been quoted in several online publications, including Yahoo! Finance, NASDAQ, MSN Money, AOL, Discover Bank, GOBankingRates, Student Loan Hero, Fit Small Business, Cheapism, SmartAsset, Bankrate, RISE Credit, AllBusiness, Cheddar, Commonbond, Niche, Rewire, Credit Donkey, Debt.com, and more. He uses the free Personal Capital app to manage his cash flow and net worth.

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