The unexpected investment you should consider for your portfolio

Art offers an interesting opportunity for investors to diversify their portfolios, but there are several things they need to keep in mind before doing so.

The Art Basel and UBS Art Market report revealed that the global art market has once again shown its resilience in the face of high interest rates, inflation, and political instability.

While the top end of the market slowed in 2023, transaction volumes increased, and online sales continued to thrive.

The report indicated that in the face of high borrowing rates, geopolitical instability, and volatile economic conditions, the global art market still managed to total an estimated $65 billion in sales in 2023.

The global art sales dropped 4% in value, and that’s not factoring in inflation.

However, the art market showed strong signs of stabilizing over 2024, with transaction volume increasing by 4%, totalling 39.4 million.

For investors, art offers an interesting opportunity for diversification, explained Cumesh Moodliar, CEO of Investec Bank SA, and Itumeleng Merafe, head of Investec Private Bank, on Investec’s Art in Focus podcast.

When you have a challenging economic environment, there is often a divergence in the market, Merafe said.

The wealthier end of the market is usually quite resilient and robust, whereas the rest of the market is slightly depressed.

In depressed markets, alternative investments, like art, often seem especially interesting since people are looking at where else they can find value.

“Similarly, when there’s volatility, and you can’t make accurate predictions around asset classes, art becomes an interesting view for people,” Moodliar added.

Additionally, what makes art appealing is that it is an “all-weather market”, he said.

While there are still good years and bad years, as is the case with any investment, it isn’t as cyclical, since there is a consistent base of art collectors and people who really enjoy art.

Moodliar and Merafe explained that there are some principles investors should keep in mind when buying alternative asset classes like art.

First, it is essential to consider your liquidity needs and ensure that you will still be financially sound if an emergency hits.

Alternative asset classes should be small additions meant to help diversify your portfolio.

Moodliar suggested that around 5% to 7% is a good proportion of alternative asset classes for your savings and investments portfolio, although it will naturally vary from person to person.

It also helps to look at alternative investments from a long-term view and adopt an “invest and forget” mindset.

“You’ve got to have your longer-term view of where you want to have your savings,” Moodliar said.

“What would you do if tomorrow the world changed and you needed to, for example, liquidate? You’ve got to think of things like Illness, changing roles, and changing jobs. Where would you be?”

If you need liquidity quickly in a situation like that, alternative asset classes are less than ideal options.

Selling a painting, for example, can take a long time or could yield less than you wanted if it is being rushed.

“You’ve got to balance all that against what your short-term liquidity needs would be, what your longer-term liquidity needs would be, and what do you do if there’s a rainy day?”

Once you have made that determination, you can decide how much to allocate.

Another reason for taking a long-term view towards these types of investments is that the real value isn’t necessarily tied to their direct monetary value.

Merafe said that any value that you derive from what would be those alternatives should be the upside, rather than the goal.

“For me personally, if we’re talking art, the dividends of the art is the enjoyment of the pieces and my ability to look at them and draw inspiration from them,” Merafe said.

When you are investing in alternative investments like art, wine, watches, or even something like postcards – it is best to opt for one that you are drawn to.