Research: Is Art A Good Investment?

Art has been rising as a new asset class for the well-diversified profile. The reported comes back are enough to capture anyone’s vision: the index of artwork sales, utilized by art advisors to market art money, shows the average annual return of 10% over the past four decades. In short, investors are embracing art-as-an-asset-class as if it were a uncovered van Gogh newly.

Research we completed lately and offered in August 2013 at the European Finance Association conference shows investors would be wise to be wary. The profits of fine art have been significantly overestimated, and the risk, underestimated. The root reason behind the overestimation of returns (and an associated underestimation of risk) is what is known as selection bias.

  • Impressive risk to prize ratio
  • Someone outgoing and highly public
  • The company’s regulatory environment
  • 11:30am to noon – Networking
  • Total EMIs shouldn’t go beyond 30% of your income
  • Searching Google for terms like (websites for sale etc.)
  • Aggressively submit to list web directories

People have suspected this bias in the indices used to report results of some substitute asset classes for years, but our analysis is the first, we believe, to discover a way to account for it. The selection bias arises when returns derive from indices built on repeat sales of fairly illiquid assets that aren’t sold randomly.

Many of the comes back based on those types of indices – like the S&P/Case-Shiller Home Price Indices – may be biased upwards. Not only will be the returns of art lower than investors think, however the risk is higher also. Our analysis, of 20,538 paintings sold between 1972 and 2010 repeatedly, found the Sharpe Ratio for art is 0.04, than the 0 rather. 24 that is previously found.

The Sharpe Ratio on U.S. 0.30. (The Sharpe Ratio is the risk-free rate of come back – such as that of the 10-12 months U.S. Treasury relationship – subtracted from the average rate of come back for a asset or profile course, divided by the typical deviation of the come back on the course or profile. The selection bias in art occurs for many reasons.

Among them: Paintings which have been in popular have a tendency to go to auction more frequently and sell at higher prices. People also tend to sell the paintings that have increased in value the most since the time of purchase. An identical selection bias is probably at the job in real estate, when, for instance, people sell houses once they have appreciated a lot in value.