Investing In Art To Hedge Against Recession

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Rising inflation is wreaking havoc on markets across the world. In the U.S., the Consumer Price Index, seen as one of the key indicators of inflation in the world’s largest economy, recently hit a 40-year high. Living costs are soaring, and it’s causing turmoil in almost every investment class. 

As an investor, the only way to protect yourself is to diversify your portfolio as much as possible. Traditional stocks and shares, bonds, and cash are a risky business in such choppy economic waters, and so the old adage that you shouldn’t leave all of your eggs in one basket has never been more true. 

How Inflation Impacts Investors

Although the stock market can be richly rewarding, it’s also one of the most volatile - and most dangerous - types of investment during periods of runaway inflation. Stock prices have a habit of rising sharply and falling rapidly, and the ride is likely going to be extremely bumpy for the next couple of years as the world works out how to deal with some of the unprecedented macroeconomic issues it’s facing. 

Stock-heavy portfolios are therefore not the way to go if you’re a cautious investor. While stocks are traditionally better at keeping up with inflation than bonds are, not all stocks are the same. For instance, energy sector stocks tend to perform better amid high inflation as the cost of energy is often directly tied to this. When inflation rises, energy prices go up, helping energy companies to offset some of the problems they’re facing. But on the other hand, technology stocks are likely to suffer. That’s because, while consumers can make do without the latest gadget, they cannot go without paying their gas bills. 

As for bonds, these are generally considered to be a more stable investment than stocks. However, the lower risk also translates to much lower returns. Moreover, when inflation runs rampant, bonds very often struggle to keep pace with it. 

One of the problems with bonds is that they’re debt-based, which means they’re usually locked to a specific interest rate. As a result, when the Federal Reserve raises its key interest rate to offset inflation, the yield provided by bonds tends to decline. There are exceptions to this rule. For instance, Treasury Inflation-Protected Securities, or TIPS, are bonds that have been designed to keep up with the pace of inflation. When investors purchase a TIPS, the principle increases with inflation and decreases if deflation occurs. These changes are based on the movements of the CPI, with interest paid out twice a year at a fixed rate. 

Alternative Investments To Combat Inflation

The good news is that investors do not have to restrict themselves only to stocks and bonds. In fact, there’s a whole world of alternative investment opportunities out there. Some of the most popular alternatives investors can put their money into include tangible assets such as gold, silver and other precious metals, antiques, coins and stamps, or other financial assets, such as commodities, cryptocurrencies, real estate, private equity, distressed securities and hedge funds. Then of course, there’s fine art. 

The world of art has become a highly recommended investment class, with Deloitte reporting that as many as 88% of fund managers advise putting at least some of your capital into it. 

“While the S&P declined 5.1% in 2018, the art market returned 10.6%,” The Wall Street Journal reported in 2018. That year, art was the best performing asset class of all, earning a higher return than the S&P 500, gold, classic cars and real estate.

How To Invest In Art?

Art might seem like an exclusive investment, and there are certainly several ways of going about it, though for most of us the options are more limited. 

Those with big budgets can of course hit the nearest high-end gallery and fork out a seven-figure sum to take ownership of some real works of art. After all, the world is full of well known artists whose work is in high demand and constantly appreciating in value. But bear in mind such investments often cost several million dollars - not exactly loose change. 

A second option is to take a chance on an up and coming artist whose work might become much more valuable in the future. The only problem with this is that it’s incredibly risky, as there’s no real way to tell who is going to become the next Leonardo da Vinci. Art, after all, is extremely subjective and the industry is dictated by trends that come and go. In other words, investing in an unknown artist is a bit like betting on some random new cryptocurrency. And for every new crypto token that goes to the moon, there are 20 or 30 that disappear off the face of the Earth. 

A safer option is to go with an art investment fund, which is privately managed by professionals who know all about the industry’s latest trends. However, these funds expect to receive a significant portion of whatever returns your investment makes, and are still quite exclusive as they’re only open to accredited investors. According to Investopedia, that means having an annual income that exceeds $200,000 a year, or $300,000 for couples. 

Perhaps the most realistic plan then is the emerging concept of fractional art ownership that’s enabled by blockchain and non-fungible tokens. Web3 startup Artfi is a new platform that provides just such an opportunity. Having recently raised $3.26 million in a private funding round earlier this year, Artfi has hit upon the idea of tokenizing prominent, high-value works of art as NFTs, which are then sold on to its community. By owning an Artfi NFT, the holder effectively owns a share of the associated artwork, giving them a novel way to enter the previously-exclusive blue chip, fine art market. 

Artfi snaps up consignments of high profile art works that range in value from $1 million to $10 million. Each piece of art is then split into 10,000 shares, which are tokenized as 10,000 NFTs that represent fractional ownership of that piece. The physical art goes on display in Artfi’s Dubai Artfi Museum, where it’s on display to the public. Artfi reserves the right to sell each artwork it buys at a later date, at which point NFT holders would be able to redeem their token for their share of the sale proceeds. Of course, NFT holders don’t need to wait for the painting to be sold - as they can sell their NFT on an open marketplace at any time of their choosing. 

But Why Invest In Art?

Art has traditionally always provided very strong returns for investors. The year 2018 wasn’t a one-off. As the above chart from the art-focused investment fund Artprice shows, the return of investment on art typically exceeds that of the S&P500 in most years. 

Now, with startups like Artfi providing easy access to the blue chip fine art market to any investors for as little as $100, it becomes possible for anyone to diversify into this extremely rewarding market. Investing in art is no longer for the rich and famous. With NFTs and fractional ownership now a thing, it’s an opportunity that promises rich rewards for all.