Beat Inflation Blues: How Art Investments Can Shield Your Wealth

A high inflation rate erodes your purchasing power. $1,000 in 10 years time will buy you significantly less than $1,000 today.

Even if you grow your wealth with savings or investments, inflation means that in real terms your wealth is growing much slower than the nominal rate—or may even be shrinking. In 2022, for example, the average inflation rate was 8%, so if your investment returns were anything less than 8%, you actually lost money in real terms that year.

To make matters worse, inflation forced almost half of Americans to cut down or stop saving for retirement, according to research by Allianz Life. Meanwhile, just over half are reluctant to invest more given current market conditions.

Inflation also means consumers are more cautious about spending. When people spend less, companies realize less profit, which can in turn drive down their stock prices.

Basically, in periods of high inflation, your wealth is being attacked from all sides.

To really grow and protect your wealth, you need to achieve returns that significantly outstrip the inflation rate. This won’t necessarily be the case for a classic stocks and bonds portfolio.

Fixed-income investments like bonds are hurt by inflation because the real value of the income is reduced. The effect on stocks is more debatable. However, periods of high inflation can lead to a positive correlation between stocks and bonds. Certainly, growth stocks tend to perform worse during inflationary periods.

What you need, therefore, is a truly diversified portfolio that includes other assets that tend to do well when inflation is high. Contemporary art is one such asset. This is for a few reasons:

• It’s a real asset that will continue to exist regardless of economic changes.

• There’s a limited supply and this scarcity can increase value during inflationary periods.

• There are art collectors all over the world and this global demand protects it from local economic downturns.

• There is also growing demand from investors as more people recognize art as an asset class.

What’s more, according to research by Masterworks, contemporary art has demonstrated an average price appreciation of 13.5% during high inflationary periods. This is significantly higher than bonds (0.5%), gold (3.2%), emerging market equities (3.9%), and even the S&P 500 (5.5%).

Also, contemporary art has a low correlation with other major asset classes, making it a good option for diversification.

Want to diversify into art?

Masterworks makes it quick and easy to diversify your portfolio with art. Simply buy fractional shares online and Masterworks will do all the hard work of analyzing, selecting, conserving, and selling the artworks.

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You may be thinking to yourself: “Sure, I need to hedge against inflation, but isn’t that what gold’s for?”

Well, of course, art isn’t the only asset class that could diversify your portfolio and protect you from inflation. Gold is traditionally seen as a safe haven asset. It’s what investors flock to in times of uncertainty to protect their wealth from inflation. But is it the best option?

Well, going in gold’s favor we have the fact that there is no minimum or maximum holding period. You can hold onto gold for as long as you like, and if your circumstances change, its liquidity makes it quick and easy to sell.

This is in contrast to artworks, which often need to be held for some years before they’re value has significantly increased. Art also isn’t liquid, so it could take some time and effort to find a buyer and complete the process.

Gold is also more accessible. You can buy as little as you like, so smaller investors aren’t priced out of the market. You don’t need to have any specialist knowledge either to invest in gold.

In fact, you don’t need to go to much trouble at all. If you invest in gold through an ETF, the fund will do the legwork of purchasing, storing, and insuring the gold—you just pay them a fee. And that brings us to another benefit of gold—the management and trading fees involved are pretty small.

On the other side of the equation, the standout benefit of contemporary art is the consistency and magnitude of returns during high inflationary periods. The same can’t be said of gold—its price actually fell during high inflation periods in the 80s and much of 2022.

In fact, research by Masterworks suggests that contemporary art’s value has increased four times more than gold’s during high inflationary periods—the average price appreciation for contemporary art was 13.5%, compared to just 3.2% for gold.

In terms of the downsides of art, many of these can be mitigated by buying art shares through a platform such as Masterworks. While you’d need significant capital and expertise to go it alone as an art investor, buying fractional shares from Masterworks is far more accessible and you can leverage the extensive knowledge of their advisers.

Masterworks may hold most artworks for 3 to 10 years, but the platform’s trading market means you can sell your shares whenever you want, liquidity allowing. The fees for using the platform are also significantly less than the standard fees for buying and selling art.

However, art and gold don’t need to be an either-or. If you really want to diversify your portfolio you can include both. The low correlation between art and gold could make this a sound strategy.

The quickest, easiest, and cheapest way to diversify into art is to buy fractional shares through Masterworks. All you need to do is sign up on the website and have a quick intro call to learn more about how it works.

It’s up to you which artworks you invest in, and Masterworks offers 3 to 5 new works each week. If you’re not well-versed in art, that’s fine—Masterworks has a ton of research you can read and a team of expert advisers you can call.

You don’t need to worry about any of the hard work like analyzing markets, selecting promising artists, acquiring paintings, and storing them. When you choose to invest, Masterworks handles everything and you can just wait until they sell the artwork (unless you want to exit sooner by selling your shares on the trading market).

Masterworks typically holds artworks for 3 to 10 years, looking for the opportunity when they can deliver the best returns to investors. This strategy seems to have served them pretty well so far—all of Masterworks’ sales so far (through to October 2023) have generated a profit. In fact, almost half of these sales have provided annualized net returns of over 30%.

Ready to add art to your portfolio?

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