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Investing in Fine Art through Masterworks: A review

It takes significant wealth to make an investment in fine art. The privately held company Masterworks, which offers a digital platform that provides investors to buy art through element of fractional investing, offers an alternative.

Investing in fine art through Masterworks allows investors a market for purchasing ownership stakes in original works of art. Investing in the work of contemporary masters like Banksy and Jean-Michel Basquiat is made simple through the platform.

On the surface, Masterworks is well-designed and user-friendly, and it has excellent research and support tools.

This makes it a tempting platform for those who want to diversify their portfolios through art purchases but do not want to spend a fortune doing so.

Users of the fine art investing website can buy and sell ownership stakes in works by artists including Picasso, Monet, Warhol, Banksy, Kaws, Basquiat, and others, who are considered “blue-chip” by the company.

By giving regular investors a chance to own a small piece of these extremely expensive investments, Masterworks is helping to make the art world more accessible.

Is it successful? And should you invest in fine art through the platform?

Explore how investing in fine art compares to other best investing options for American expats in 2023.

In this article, we will discuss those questions and examine what Masterworks offers for investors, as well as look at the pros and cons of buying fine art as an investment.

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

What should I know about investing in fine art?

Fine art is an investment that can give you financial benefits as well as aesthetic value. It can be a good way to diversify your portfolio, or a great way to grow your wealth and enjoy the art you love.

But there are also some risks involved with investing in fine art and it is important to be aware of them before you make this kind of investment decision.

The art market is a large and growing one. The global art industry was worth over $68 billion in 2022, the second largest value in the last 15 years, surpassing the recorded values before the coronavirus pandemic.

The sector is fragmented, however. It is difficult for buyers to find what they want or need because there are so many different sellers offering such a wide variety of products.

In addition to this, there is no central marketplace where you can find all the pieces available at once. Instead, each piece must be tracked down individually by visiting galleries or auction houses.

This means that anyone who wants to invest in fine art must do their research carefully before buying anything. Otherwise, they may end up with something that does not suit their taste or budget, or in the worst cases, a forgery or imitation.

Most people don’t understand how the art world works. The art world is a very complex system. It is not just about how much you pay for something, but also who else is interested in that piece of art and what they are willing to pay for it.

There are many different people involved in the art world: artists create works of art; galleries sell those works; collectors buy them and sometimes resell them; auction houses sell them at auction; museums display them on their walls or loan them out for exhibitions around the world; critics review these exhibitions and provide feedback on which pieces could be worth investing in… the list goes on.

Many people invest in fine art as an alternative investment class to hedge against inflation, or to preserve their capital. Art is also a good way to diversify your portfolio and invest in something tangible.

It is not hard to see why many investors choose this type of asset, as aesthetic value alone can sometimes push the price of a work of art in the millions, but there is also a lot of caveats involved in buying fine art.

Unlike stocks and bonds that can be easily sold, art can be difficult for a novice collector to liquidate quickly if needed.

Moreover, it requires knowledge about artists and the market before making any major acquisitions, and there are some tax considerations associated with owning artwork.

If you’re thinking about buying art as an investment, there are a few things to consider first.

  • Do you have a budget? If so, how much can you afford to spend?
  • Do you understand the art market? If not, take some time to research it before buying anything.
  • Are you willing to take risks with your money or would rather play it safe with something more stable like stocks or bonds?

If the latter is true for you–and many people do prefer this approach–then fine art might not be right for your portfolio just yet.

You should also make sure that the work you want to buy has been authenticated by experts and is not a fake.

Authentication is a process of checking the authenticity of an item, such as a painting or sculpture, which can be done either by an expert in the field or with scientific methods. It is important for the value of the item in question to be accurately gauged.

In recent years there has been an increase in demand for fine art investments due to their high resale value and limited supply of available works on the market, but this also means that there are more opportunities for fraudsters who try to pass off fakes as genuine pieces.

It is also worth noting that the value of fine art can change rapidly and dramatically.

If you’re considering investing in fine art, know that it’s a highly volatile investment. You will have to be prepared to take a loss if the market goes down or sell quickly if the piece suddenly becomes valuable. It is not for the faint of heart.

And as with all investments, you should also never invest more than you can afford to lose.

This means that no matter how much money you put into fine art as an investment, don’t put all your eggs in one basket with only one piece of work.

Investing in fine art through Masterworks can be a good stepping stone towards learning about art investments.
Investing in fine art through Masterworks can be a good stepping stone towards learning about art investments.

You also need to have patience when investing in fine art. When you invest in fine art, you should be prepared to hold onto it for a while.

The art market is not as liquid as other markets, meaning that it is harder to buy and sell at will.

While you can buy stocks online or through apps like Robinhood, there are no such services for buying and selling physical fine works of art.

Masterworks may offer a platform for buying and selling ownership stakes, however, this is quite different from owning real pieces of art. This means that if you’re looking for an immediate return on your investment, this isn’t the best option for you.

If patience isn’t your strength and quick returns are important, then investing in fine art may not be a wise choice. However if long term growth, or having something physical to hedge against inflation is something that interests or motivates you, then this could work well.

Finally, and perhaps most obviously, you will need a lot of money if you are going to get involved with fine art investing.

To get involved with fine art investing, you will need to be able to afford the artwork in question.

The more money you have available for investing in fine art pieces and collections of your own, the better off your investments will be overall.

Why invest in fine art?

Investing in fine art requires some luck or insider knowledge, but it also requires careful research and planning on your part.

The art world is a very large market. There are many opportunities for investment, and it’s not uncommon for people to get into the game without doing their homework.

You need to be able to tell if an artwork will appreciate in value over time and how much of that appreciation could be realized by selling it privately or at auction.

You also need to make sure that what you’re buying isn’t just a knockoff. Authenticity an important factor in fine art investing.

An original work of art will always be more valuable than a copy because of their inherent scarcity. In spite of claims like “museum quality” or “archival” and the presence of a “certificate of authenticity,” a giclée will never be worth as much as the original it was reproduced from.

A giclée is a type of machine-made print that produces reproductions on high-quality paper or canvas that are nearly indistinguishable from the originals in terms of color and clarity. It is a copy nonetheless.

Some professionals in the art world consider giclées to be little more than a marketing ploy aimed at inexperienced artists and collectors.

There is no surefire way to make money in the art market, but with little research and planning, you may decorate your house with pieces that could increase in value over time.

Fine art is valued according to several aspects, including the rarity of the piece, the artist’s reputation, the print’s quality, and whether or not it is signed and numbered by the artist.

Fine art is a dicey investment, but it might pay off for the right buyer. Investing in art is risky because it’s impossible to predict whether or not a given piece will increase in value.

Rare works of art, especially originals as opposed to reproductions, command higher prices. The date of an art or artist’s release can also be crucial. Moreover, there are often hidden expenses associated with buying art, such as warehousing, insurance, and commissions.

An appraisal is a must before purchasing a work by a famous artist. Keep quality in mind, and avoid second-hand or damaged items. You could make friends with the next Rothko or find a buried masterpiece worth a million dollars with just a little bit of work.

There are many ways to invest in art, from buying from galleries and auctions to trading with other collectors.

Galleries are a great place to start if you are looking for original works of fine art. You can browse their inventory online or visit them in person, then purchase pieces directly from the gallery owner.

Some galleries offer financial services such as appraisals and loans so that you can purchase more expensive pieces without taking out a loan yourself (or borrowing money from someone else).

Auction houses sell both new and old masterpieces at auction events held throughout the year. These could be online or live auctions held at local venues like hotels or convention centers where attendees bid against each other until all items have been sold off.

There are also silent auctions where people submit bids by mail before an event begins but do not speak up until after bidding has ended so no one knows how much anyone else has offered thus far.

Be wary of gallery owners who say purchasing art is an emotional decision rather than a financial one.

If you have the means, purchasing works of art for your house can be a smart financial move as well as a source of aesthetic pleasure. If you want to make the most out of your investment, you should focus on unique and uncommon things and avoid selling during economic downturns.

If you’re sure about investing in fine art, explore the careers of any intriguing contemporary artists. Find out where they went to school, what they have worked on, and what they have displayed.

Regularly checking out the local art scene by visiting museums and galleries will help you spot future big name artists.

Buying and selling fine art can be a great way to make money, but you should be careful about the value of your pieces. If you are not sure about the value of an item, hire an expert to help you assess its worth.

Art is a long-term investment, and although the art market can be stable or even show enormous returns on investment during economic booms, it is one asset that can easily fall in value during seasons of recession.

What is Masterworks?

If you want to diversify your portfolio with fine art but are put off by the high price, high risk, and high inconvenience of buying individual pieces, Masterworks may be a good solution for you.

Masterworks CEO Scott Lynn said Select he founded the company in 2017 after witnessing the value of his personal art collection rise and concluding that it should be accessible for all types of investors.

The Citi Global Art Market chart, cited by Masterworks, shows that over the past 25 years, investments in contemporary art have outperformed the S&P 500, providing an annual return of 14% compared to the S&P 500’s 9.5%.

It is important to remember, nevertheless, that past results are no guarantee of future achievement.

There are currently over 250,000 investors using the Masterworks platform, the vast majority of whom are on the lookout for new investment opportunities.

With Masterworks’ $10,000 minimum investment, normal investors won’t need millions to own priceless modern artwork.

However, investing in art comes with some unexpected dangers. Masterworks may not make a profit on the sale of an artwork for up to ten years, and there is no assurance that the artwork will increase in value.

Masterworks estimates that the average yearly return on the contemporary art market over the past 26 years was 14.1%.

Customers seeking a greater reward for a higher level of risk can consider Masterworks. Potential investors should also have an interest in and familiarity with the modern art scene to make informed decisions about which individual works of art to purchase.

Masterworks may not be a good fit for investors trying to produce passive income or who prefer simpler, safer alternatives.

Furthermore, it is a bad option for investors in need of quick cash. It is possible, but not guaranteed, that you will be able to sell your shares on the Masterworks secondary market for cash.

Until the Masterworks platform sells the artwork in which you have invested, it is best to only invest money that you can afford to keep locked up for years.

How does it work?

How it works is that the company’s research team looks at the work of up-and-coming modern artists and buys pieces that they think will appreciate in value.

An investment in Masterworks can be made at a relatively low cost. What was once only available to the wealthy is now open to all types of investors.

Masterworks submits paperwork to the United States Securities and Exchange Commission after purchasing a modern work of art so that investors can buy small fractional interests in the artwork.

Then, on the Masterworks website, investors can buy a piece of the artwork for as low as $20. The organization claims to release a new work of art every four to five days on average.

Since all artworks are registered with the SEC as “qualified investments,” Masterworks is able to accept both retail and accredited investors.

Once an individual artwork’s SEC filing is approved, Masterworks conducts a primary offering of its shares to its members for a period of 90 days. Shares can be purchased at the market price in any quantity chosen by the buyer.

The platform distinguishes itself by specializing in the most high-end, return-guaranteed portion of the art market, as determined by proprietary data. In the meantime, its analysts are busy determining win/loss ratios, correlations, and rates of appreciation.

The average time an artwork spends in Masterworks’ storage is between three and ten years, during which time the gallery looks for a buyer in the contemporary art market. As of late 2022, seven artworks have been sold so far, yielding an average realized net return of 17.8 percent for the company.

Net returns for Rhubab by Joan Mitchell were 17.8 percent each year, for Staring Into Space by George Condo 21.5 percent, and for Lady Day II by Sam Gillman 33.1 percent.

Meanwhile, Banksy’s Mona Lisa has a 32% annualized net return; Cecily Brown’s Lure has a 27.3% annualized net return; Claude Monet’s Coup de Vent has a 9.2% annualized net return; and Albert Oehlen’s Doppelbild has a 36.2% annualized net return.

Once an artwork is sold, Masterworks will distribute the money to the investors who bought shares in the artwork, based on the amount of shares each investor owns.

Masterworks provides a secondary market for those who wish to liquidate their fractional interests prior to the sale of an artwork.

Shares can be bought and sold amongst Masterworks users, while there is no assurance that there will be a buyer for your shares at the precise moment you decide to sell. The demand from other Masterworks clients is the sole determinant of secondary market prices.

Keep in mind that the Masterworks secondary market is restricted to U.S. residents who maintain a financial institution account in the United States.

What are the costs?

There are two prices to consider when investing in fine art through Masterworks. To begin, there is an annual maintenance fee of 1.5% of your account’s entire value.

They take this hit to equity every year, reducing the number of shares you own by a small amount. Cash payments are not accepted for this service.

Second, Masterworks will retain 20% of the profit from an artwork sale made on the open market between three to 10 years following acquisition. Masterworks uses these profits to pay for things like SEC regulatory fees, art storage, insurance, and appraisals.

There are no hidden fees when making a purchase on Masterworks. There are no fees associated with the initial purchase or subsequent resale of the shares.

What are the benefits of the Masterworks platform?

Investors can find an accessible stepping stone towards learning about art investments

Users can find excellent contemporary art and fine art market research materials on Masterworks. The best part is that they have a database where you can look up the prices of thousands of different works of modern art. You can look up artist name to see what their artwork is currently selling for.

Information such as the artwork’s most recent sale price, its gross appreciation, and the annual investment return are all included in the database. Additionally, Masterworks features educational materials and films on the topic of art investment.

By learning about how to invest in fine art, investors can get their foot in the door with regards to diversifying their portfolio.

Investing in artwork typically yields a larger return than investing in stocks, bonds, or property. Over the past 26 years, the average yearly return on investments in art has been 14.1%. The S&P 500 gained 9.9% annually over this time frame.

Adding artwork to your investment portfolio can help spread out your risk. You may protect your portfolio against a stock market crash by investing in the ups and downs of the fine art market.

The Masterworks platform is well-designed and easy to use

The Masterworks interface is uncluttered, straightforward, and expertly crafted. The resources for learning about and purchasing art are readily available. You can also use a mobile app to get into your account.

Historically speaking, only the very rich could afford to invest in works of art. It was not enough to have the money to buy an expensive piece of art outright; you also need to be able to afford the additional, continuing costs of keeping it safe and insured.

There are no mutual funds or ETFs that specialize in fine art.

Therefore, that there are shares in works of art that individual investors can purchase directly through Masterworks offer a lot of versatility and accessibility for the larger global investor community.

In addition, any form of investor can participate. You don’t need to be a high-net-worth individual or accredited investor to use their services.

What’s more customer service is available via phone and email at Masterworks. During the preliminary interview, you can quickly and simply link up with one of the platform’s art specialists.

After discussing your objectives and level of risk tolerance, the experts will recommend works of art that fit within your comfort zone.

What are the drawbacks of Masterworks?

Masterworks provides no guidance towards creating art investment portfolios

Despite Masterworks’ hefty annual management fee, your portfolio’s fractional shares are completely up to you.

You can compare this method to using a robo-advisor or a mutual fund, where a team of experts chooses the investments for you.

This may not be a deal breaker for those with a keen eye for modern art. But if you aren’t up-to-date on the latest developments in the fine art market, you can miss out on some excellent options.

Before being included in Masterworks, each piece must pass a rigorous quality check to ensure it is worthy of becoming an investment. However, in the end, it is up to you to determine which books are the most suitable for your needs.

Therefore, it is highly recommended that you seek the services of a trusted financial advisor who can help you create a portfolio you are happy with and manage your art investments for the long-term.

Masterworks does not make art investment any less risky.

Investing in fine art is a highly risky affair, as made clear to you by many times by Masterworks. Unlike investments, artwork does not yield recurrent income streams such as interest or dividends.

Masterworks does not promise a return on your investment because it is contingent on a future buyer paying more for the artwork.

There is a secondary market on the platform that allows users to cash out early, although doing so is risky. You can try to sell your shares, but you will need to find another Masterworks user who is also interested in purchasing.

There is also the matter of the additional duties on every artwork you purchase. As a collectible, fine art is subject to the same long-term capital gains tax rate of 28 percent as any other collectible.

That is a higher rate than even the highest rate of long-term capital gains tax on traditional investment assets in the United States, which is now at 20%.

There are barriers to entry.

Masterworks requires a phone interview with a specialist before you can join the platform of investors.

The interview is not a screening mechanism to eliminate unqualified candidates; rather, it is an opportunity for Masterworks to learn more about you, address your concerns, and make investment suggestions.

The interview procedure may be tedious for some customers who would rather invest entirely digitally and quickly get started.

Masterworks is also only available to U.S. citizens who have a U.S. bank account to purchase and sell shares. This may prevent foreign investors from using a vital part of the platform.

Should you invest in fine art through Masterworks?

Investors in Masterworks are expected to put up a certain amount of money in order to purchase any artwork. There is a cap of 10% every piece of art that an individual investor can own.

Masterworks gets 20% of the sale price of an artwork as well as a 1.5% annual maintenance fee. The offering materials that investors receive will include information on any other fees that may be incurred.

Although the management fee and 20% of profit are typical for a hedge fund, they are costly compared to other investment options such as index funds that monitor the market.

However, similar to other alternative investments with high costs and increased risk, fine art may offer the opportunity for larger returns.

The organization is now running on a queue, so investors may have to wait a while before they can begin selecting individual paintings to invest in.

Anyone interested in art investing can visit the Masterworks website and apply for membership, which includes the aforementioned phone interview with the company’s membership team to discuss investment objectives and comfort levels.

Investing in fine art through Masterworks can be a simple endeavor, but there are a lot of things to consider. | Photo: Pixabay
Investing in fine art through Masterworks can be a simple endeavor, but there are a lot of things to consider. | Photo: Pixabay

Although it is tempting to get your hands on a famous work of art at a reasonable price, remember that buying art is a long-term investment. You must be willing to risk losing your money for an extended period of time.

The investors will not see any gains until the painting is sold by Masterworks. Alternately, prior to Masterworks selling the painting, the investor can try to unload their shares on Masterworks’ secondary market.

Masterworks plans to keep its artwork for three to ten years before selling it and dividing the proceeds equally among investors based on their share count.

Masterworks’ strategy is to highlight only proven artists and works, but remember that investing in art carries the same inherent dangers as any other type of investment.

The resale value of an artwork is susceptible to the whims of the market and the popularity of the artist or style. Even though Masterworks verifies artists and artworks in advance, the art market as a whole is significantly less regulated than the financial market.

Before you start investing in art, it is a good idea to take care of some basic financial matters like paying off high-interest credit card debt, saving money for an emergency, and opening a 401(k) or an IRA.

You may maximize your retirement savings with standard and Roth IRAs from Charles Schwab, Fidelity Investments, and the robo-advisor Betterment, or with a trusted financial planner that is well-acquainted with your goals.

After you have gotten your financial house in order, it could be a good idea to examine what investing in some of the world’s most famous works of art can do for your long-term prosperity.

Bottom line

Investing in fine art is a risky but potentially lucrative way to diversify your portfolio. Art can be an effective hedge against inflation, since its value tends to increase over time.

However, predicting the value of art is difficult, and you may need to hold onto it for many years before selling it at a profit. This makes investing in fine art less liquid than other assets—meaning you might need to keep your investment for longer than you would with stocks or bonds.

If you want to get involved with this type of investing, it is important that you do your research first and understand what makes an artwork valuable.

Better yet, you can seek the services of a trusted financial advisor or wealth management specialist who can help you make sound financial decisions as you make your foray into art investing.

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

This website is not designed for American resident readers, or for people from any country where buying investments or distributing such information is illegal. This website is not a solicitation to invest, nor tax, legal, financial or investment advice. We only deal with investors who are expats or high-net-worth/self-certified  individuals, on a non-solicitation basis. Not for the retail market.

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