Personal Finance

My partner and I have over $5 million in savings - is collecting art a valid way to diversify our investment portfolio?

Kristin Hitchcock

Published: December 5, 2024 11:35 am

It’s important to have a diversified portfolio. Many people take this to mean things like stocks, bonds, and real estate. But what about art?

A recent Reddit post raised thought-provoking questions about rules and strategies for art as an investment. The Redditor and their partner have begun acquiring post-WWII lithographs and originals. However, they don’t have precise goals or budgeting and don’t really know how to invest in art.

I thought this was a very interesting question, as art isn’t often spoken of as an investment! While this is only an opinion piece, consulting a qualified financial advisor is strongly recommended for tailored guidance.

24/7 Wall St. Key Points

• Investing in art can be a unique, enjoyable way to store wealth. However, it isn’t a traditional investment option for a reason.
• If you do decide to invest in art, do it with clear goals and risk management.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

1. Art as Investment vs. Art as a Personal ‘Want’

Many people purchase art because they like it! However, this doesn’t mean the purchase is an investment, especially if you’re purchasing art based on your personal preferences. Art can occur in both roles:

• Art as an Investment: Art can serve as a store of wealth and a hedge against inflation. Blue-chip artists often have a track record of appreciation over time, making their work attractive for those seeking long-term growth.
• Art as a Want: Unlike stocks or bonds, art offers aesthetic and cultural value, which makes it unique among asset classes. That said, many people do choose stocks based on companies or products they like.

Our Advice: It’s important to define your primary motivator for purchasing art. Are you using it to help you reach your financial goals? Or are you choosing it for enjoyment alone? While you don’t have to have just one goal, it’s best to make decisions with one goal in mind.

2. How Much Should You Invest in Art?

The OP asks whether art should comprise 5–10% of net worth. The answer depends on your broader financial goals and risk tolerance.

Art can reduce reliance on other income-generating assets. However, it is very illiquid and doesn’t provide a cash flow. Generally, this makes is less useful as an investment when compared to other options.

A common rule of thumb for alternative investments (including art) is 5–10% of net worth. This keeps your portfolio balanced while allowing for the potential upside of art investments. However, many people may want to keep less than this amount in art because of its illiquidity.

Our Advice: Work with a financial advisor to establish a diversification strategy that aligns with your net worth and retirement plans, such as fatFIRE. We’ve covered fatFIRE extensively!

3. Do Art Investments Work for FatFIRE Goals?

FatFIRE, or achieving financial independence with a high standard of living, requires balancing current lifestyle needs with future wealth growth. Because they’re posting in the fatFIRE subreddit, this is the main question our Redditor had!

Art investments can support wealth preservation. However, they don’t directly generate income. They can be sold, but this is a process! They’re generally illiquid.

Many investors view art as a way to store wealth in a tangible, appreciating asset that also offers portfolio diversification.

Our Advice: If you’re pursuing fatFIRE, prioritize other income-generating assets while viewing art as a secondary wealth-preservation tool. It should not be a primary tool.

4. Mitigating Risks

Art fraud and questionable provenance can be significant risks, especially in a market with limited regulation. Smaller galleries often offer emerging artists, while major auction houses can provide better authentication. Which one you choose depends on your specific wants and risk tolerance.

Working with different sources is recommended, as this can reduce exposure to specific markets. If one dealer is fraudulent, at least only one purchase was impacted, not your whole portfolio!

Our Advice: Buying art requires doing extra due diligence, like requesting a certificate of authenticity and consulting independent appraisers. You may want to prioritize well-known auction houses and established galleries for bigger purchases.