Many families enjoy collecting art, amassing valuable collections through the years. Other than the intangible value of personal enjoyment, art can be an important asset to incorporate into your investment portfolio. As a relatively illiquid asset, art can provide a cushion against the volatility of the stock market. In fact, art values have more than held their own in downturns, including the 2008-09 collapse of the financial markets and the more recent pandemic.

If you are considering becoming an art collector, you should start with the mindset of collecting and not focused on making money. When you begin by building your portfolio, purchase pieces you like without regard to future value. Unlike stocks or bonds, each work is unique, even if part of a series by the same artist. Therefore, personal taste and appreciation should be the paramount drivers for collectors.

While some collectors build an eclectic assortment of works of different styles and periods, others prefer staying with a particular theme. For example, my wife and I enjoy collecting art with depth, so some are lenticular art which superimposes tiny pictures to create a multidimensional image that changes when viewed from different angles.

Advice for collectors

Whether you are starting to buy works of art, have amassed a collection, or inherited valuable pieces, it is wise to seek help from an experienced professional familiar with the art world. An expert can educate you about the often-opaque art market and help you avoid potentially costly mistakes. Here are several other tips for collectors:

1. Take it slow. Do not jump into buying. Start visiting art galleries and shows just to browse until you have a sense of the type of art you like, which artists you prefer and start to have an understanding for the price points.

2. Be prepared to negotiate. Once you are ready to buy, get used to speaking with the art dealer about pricing. In most cases there is margin to negotiate.

3. Consider your ownership options. Rather than own the work personally, there may be estate planning advantages to having an LLC or a trust hold title to the work. For example, if you own a vacation home in another state or country, it may make sense for the work to be purchased by an LLC, one separate to the entity that may own your property. Another little-known issue is that if you have artwork on a yacht and it docks in a foreign country, you may have created a taxable event for importing artwork.

4. Obtain detailed information. Prior and at purchase, ensure you are provided with detailed information about the artist and the work itself along with the bill of sale and a certificate of authenticity. This will include a description of the work, a photograph, along with the date the work was produced, and the medium used. Obtaining the “provenance” of the piece is essential for insurance purposes, as well as a future resale. Make a digital copy of this documentation and keep the originals in a secure location.

5. Mitigate the risks. Check what your insurance covers you for and ensure your coverage is always up to date. When you acquire new pieces, be sure to add them to your policy. You should also be sure the pieces are mounted securely and protected from sticky or the damaging rays of the sun. Update the insured value of your artwork at least once a year: this also gives you the option to use your collection in the future as collateral.

6. Look for buying opportunities. Once you have a good understanding of your chosen segment of the art market, keep your eyes open for buying opportunities. During the pandemic, for instance, many galleries lowered their prices to attract online buyers who could no longer visit in person. We have experienced periods where an artist or their estate might release too many works at the same time, temporarily depressing values.

7. Incorporate your collection into your estate plans. Think about how your heirs view of your collection. Some may love it, whilst others may be ready to sell it immediately. How can you split up the collection equitably and not create discord? There may be tax benefits form conveying or lending your collection to museums, so be sure to discuss your options with an experienced estate planning advisor.

Becoming an art collector opens the door to an exciting world of personal enjoyment and potentially some financial benefits. Do not rush in, take your time, learn from the experts, and enjoy the journey!