Fractional Art Investing: Diversify Your Portfolio With Fine Art

Art is an exciting alternative that can produce strong returns and allow investors to partake in the preservation of beautiful, influential masterpieces. However, the art market often requires a high level of art expertise, strong connections in the community and a large portfolio. Investment-grade fine art often costs tens of thousands of dollars, making it an inaccessible asset class to many investors.

Fractional art investing has revolutionized art investing. It allows a wider range of investors to participate in the exciting and potentially lucrative art market without high investment minimums. Fractional art investing may be a great addition to some portfolios, though all investors should conduct thorough research before investing.

Understanding the Basics of Fractional Art Investing

The art market has a track record of often outperforming the S&P 500. It can be a great asset class for diversifying a portfolio and has many benefits outside of financial gain. It allows investors to partake in cultural preservation and support artists. However, art investing traditionally had many obstacles that made it an impractical investment for many individual investors. Art trading was reserved for the ultra-wealthy who had the time and capital to partake in the art market.

In 2017, the Masterworks platform revolutionized this asset class by offering fractional art investing. This platform allows investors to buy shares of blue-chip art, meaning investors can add art to their portfolio without needing to spend thousands of dollars on one piece of art.

Since then, many more art investing platforms have come onto the market, each adding its own flare to fractional art investing. Many investors are realizing how lucrative the art market can be and how the asset class can be a good hedge against inflation. It continues to rise in popularity, which indicates the art market will continue growing strong.

What is Fractional Ownership of Fine Art?

Fractional ownership in art is a similar concept to owning stocks in a business. When you own a stock in a company, you own a small fraction of that business. In the same way, when you buy a share in a piece of art, you own a percentage of that piece. For example, if a piece of art is valued at $100,000 and you purchase one share for $1,000, then you own one-hundredth of that painting. 

The Role of Technology in Fractional Art Investments

The rise in financial technology has played a huge role in making fractional art investing a possibility. Using apps and online platforms has allowed more people to easily access the art market. Before, investors had to attend galleries or auctions to identify pieces they’d like to invest in. Now, investors can go online to browse a large category of art. Without the reach provided by technology, it’d be much harder to connect investors to these alternative assets.

How Does Fractional Art Investing Work?

Thanks to easy-to-use art investing apps and platforms, fractional art investing is fairly easy. Investors may also invest in art funds, where a management firm creates an art portfolio and the investors invest in the entire portfolio.

First, you’ll need to identify the fund or platform where they’d like to invest. Some platforms may have minimum investment requirements, and you will need to fund your account with that amount before being able to invest. After the account is funded, you can browse the platform’s offerings. You should be able to view the piece’s total price, price per share, information about the piece and the artist and the price history.

Once you find a piece that makes a good investment, you can purchase shares. These shares give you fractional ownership over that painting. The piece itself is held by the platform or fund and their art and investment professionals will identify the best times to sell. If one of your investments sells, you’ll receive a percentage of the returns that correlates with your percentage of ownership, minus any fees. Additionally, some platforms may allow you to sell your shares early to a secondary market.

Pros and Cons of Investing in Fine Art Masterpieces

Before adding an asset to your portfolio, ensure you understand all the details of the investment. Including the advantages the asset might bring to your portfolio, as well as any associated risks.

Advantages of Fractional Art Investing

• Diversification: Diversifying away from traditional markets can be a great way to mitigate risk in your portfolio. Fractional art investing allows for easy diversification within the asset class. Investors can easily buy shares of a variety of blue-chip art across styles and artists to create a robust art portfolio.
• Professional guidance: The art is held by the platform or fund, meaning investors don’t need to decide when to buy or sell. Investment and art professionals will make those decisions for you, using in-depth market analysis.
• Lower investment minimums: Buying investment-grade art would typically cost hundreds of thousands of dollars. Fractional art investing allows investors to partake in the market for a much lower investment minimum, making it easier to diversify and build a portfolio.
• Accessible: Investors can access these investments easily from their computers or phones. Traditionally, art investing required dedicating time to go to galleries and auctions, which alienated investors who didn’t have that time to spare. Now shares of art can be purchased in minutes from your mobile device.

Disadvantages of Fractional Art Investing

• Market volatility: The art market has a history of strong returns, but that doesn’t mean it’s immune to market volatility. Changes in trends and consumer sentiment can cause pieces to not rise in value as expected and can cause losses. It’s best to create a diverse art portfolio to mitigate this risk.
• High fees: Some platforms and funds may charge high fees upon the sale of a piece of art. They may take a percentage of the sale’s profit, as well as charge management fees, annual fees and more. Ensure you understand the fee structure before investing and how it’ll impact your returns.
• Lack of control: Some investors may not be comfortable with the lack of control over their investments. Investors get no say in when to sell their piece. The choice to buy or sell lies with the platform or fund managers. Some platforms may allow shares to be sold on a secondary market, but there’s no guarantee those sales will produce strong returns. Before investing, ensure you trust the management team and are comfortable relinquishing control to them.
• Lack of liquidity: Art is not a liquid asset class, which some investors may not be comfortable with. Most fractional art investments have a holding period of three to 10 years, and some may not allow you to exit the investment beforehand. Carefully read the exit opportunities of an investment, if there are any, and prepare to be in the investment for the long term.

Tips on How to Maximize the Benefits of Fractional Art Investment

• Conduct market research: The best way to maximize your returns is to make informed investment decisions. Even though fractional art investing is more passive, it’s a good idea to keep up to date on market performance and trends. Understanding what styles are popular among collectors and what artists are hot will help you choose investments that are more likely to perform well.
• Verify authenticity: A piece of art will only be valuable if it’s authentic. Ensure the piece is real and understand the platform or fund’s process for evaluating authenticity and value.
• Set a budget: Art is not very liquid, and over-allocating into any asset class can cause your portfolio to be unbalanced. Look at your portfolio, financial goals and risk tolerance and then create an informed budget for how much you can invest in art.
• Adopt a long-term perspective: Art is not a short-term investment and viewing it as such will only cause frustration. View your art investments as long-term investments and don’t expect or rely on returns until years later.
• Choose reputable organizations: There are many art investing platforms on the market. Before investing, research all of them and understand their track record and fee structure and read user reviews. Finding an organization that you completely trust will help ensure you get the best possible performance and soothe anxieties you have about your investments.
• Meet with your adviser: Before making any new investment, it’s best to meet with your financial adviser. They’ll take an objective look at your portfolio and financial situation and provide personalized guidance. They can tell you if art would make a good addition and how you can safely allocate and may provide other suggestions for navigating this new asset class.

Take Part in the Art Market

The art market was once only accessible to the ultra-wealthy and investors who had the time to go to galleries, auctions and other events. Fractional art investing has revolutionized the art market and opened this existing asset class to a much larger group of investors. If you’re looking for a unique asset class to add to your portfolio, fractional art investing may be a good route. If you have any concerns about how art will fit into your investments, talk to your trusted financial adviser.

Frequently Asked Questions