Investing Tip: Forget the Market…Buy Art!

If the stock market's ups and downs are driving you crazy, consider investing in timeless masterpieces.

More than 150 years ago, writer Seba Smith commented, "As it is said, 'there are more ways than one to skin a cat,' so are there more ways than one of digging for money." If your efforts to lift your net worth through stock and real estate investments aren't producing, you might try a little digging into the fine art world.

From wall to balance sheet

Art's popularity as an investment has risen and fallen through the years. Surprisingly, these ups and downs average out to a relatively strong return over time, one that gives the stock market a run for its money. Art trades like any other commodity, with demand typically rising in times of economic uncertainty. This may be the reason why trading volumes and prices for art have climbed worldwide in recent years-when stock markets and currencies are going haywire, investors find comfort in owning something tangible that has lasting value.

American buyers certainly appear to be following this train of thought. At Sotheby's Impressionist and Modern Masters auction in New York last month, 54 percent of the buyers were Americans. At Christie's Impressionist and Modern evening sale, the percentage of Americans was lower, but still strong at 32 percent. Considering that the average lots were $5.7 million at Sotheby's and $6.3 million at Christie's, it appears that Americans weren't dissuaded by the meager U.S. dollar or turbulent stock market.

Market trends in art trading are benchmarked by the Mei Moses fine art index, which relies on data from more than 50 years of auctions held by Sotheby's and Christie's. Between 1950 and 2005, the index shows an annualized return of 10.47 percent. More importantly, the movement of the index indicates that art has a low correlation to the stock market-a quality that makes art investing an attractive diversification strategy.

Beware of banking on big returns

Art investing is not for the weak at heart, however. As with real estate, art isn't liquid. If you don't have a buyer, that original Chagall etching is essentially worth nothing. Also, take into account the regulatory differences between stock and art trading; relative to the stock market, the art trade offers far fewer regulatory protections. It's easier for unscrupulous dealers to inflate prices artificially, sell fakes, or otherwise rip you off. Finally, for all the big gains art has seen in recent years, the Mei Moses index has shown some dud years, as well.

Given these risks, experts advise against banking on big returns from artistic masterpieces. Instead, buy that stunning sculpture because you love it. If it happens to be a creation that gives your net worth a big lift when it's time to sell, enjoy your good fortune.