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Building a well balanced investment portfolio is, frankly, an art of its own.
Conservative portfolios tend to have a higher percentage of fixed income investments such as government bonds.
While moderate to high risk portfolios will feature a higher percentage of equities like stocks.
However, the old school stock and bond allocation advice is largely based on accessibility. For the last few decades, that is primarily what was available to your average retail investor.
Today, there are countless avenues for adding alternative investments to your portfolio, including:
- Investing in artwork
- Buying farmland
- Private real estate
An alternative investment is one that is not a traditional asset like equities, bonds and cash.
So where do alternative investments fit in? How much should you invest in art?
In this article, we seek to answer that question.
What Is A Balanced Portfolio?
Building an investment portfolio takes a bit of planning:
- If 100% of your investments are in equities like stocks, then your portfolio carries major risk should the market experience a correction or crash
- On the other hand, if your portfolio has a healthy mix of asset classes, then you are well positioned to handle blips in the market
Many have tried to provide a percentage based approach to building a portfolio, but the reality is that a well-balanced portfolio depends on the investor.
Some investors have a much greater tolerance for risks, while others do not. Neither is necessarily better or worse. It’s all about what portfolio allows you to stay in the market, versus putting your money in and out.
Factors that play into the type of portfolio you build would include your age, current financial positions, and tolerance for risk.
It’s common to read a suggestion like 50% in equities (within equities to diversify among large and mid cap companies as well as international companies), 20% in real estate, 20% in fixed income investments, and 10% in alternative investments.
Of course, this is a suggestion only and not financial advice.
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How Much Should You Invest In Art?
How much an individual should invest in art will certainly come down to their own personal preferences.
Consider the following questions:
- How passionate are you about art?
- Are you willing to hold an art investment for 5+ years?
- Are you able to stomach the high risk associated with the art market?
Art is considered a highly illiquid and risky investment. Mark Cuban, billionaire and owner of NBA team The Mavericks, once told Vanity Fair that putting 10% of your portfolio in high risk investments was reasonable.
In an interview in 2016, Michael Moses, founder of consulting firm Beautiful Asset Advisors, stated that art investments could reasonably take up to 20% of your portfolio.
Most financial advisors agree that alternative investments as a whole should take up no more than 15 to 30% of your total portfolio.
Of that 15 to 30%, a portion of that could be allocated to artwork.
Let’s say you had a portfolio of $500,000 and you wanted to allocate 15% of your portfolio to alternative investments.
That would be $75,000.
However, you wouldn’t ideally want to put all of that money into artwork. Instead, you would want to split that money up across multiple alternative assets.
Out of your original $500,000 – you could invest your $75,000 alternative investment allocation into:
- 33.3% Artwork – $25,000
- 33.3% Crypto – $25,000
- 33.3% Private Real Estate – $25,000
This is for demonstration purposes only and not financial advice.
So, in this example, an individual may invest about 5% of their overall portfolio into artwork.
How To Invest In Artwork
Most people tend to think that art investing is for the rich only.
In recent years however, platforms like Masterworks, Yieldstreet and Otis have sought to change that.
Of course you can get started with art by purchasing a piece of work through an art gallery or auction house like Sotheby’s or Christie’s, but you can also get started with a little less risk and money using one of these investment platforms.
If you do decide that artwork belongs in your portfolio, then it would be wise to start small and begin understanding the intricacies of the art market.
While there exists many estimates for the proper allocation of artwork in a portfolio, it’s common to hear that alternative investments should account for no more than 30% of a portfolio.
The right allocation for art in your portfolio will ultimately come down to your understanding of art and passion for the subject.