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What’s the first thing that comes to your mind when you think about diversifying your investment portfolio?
If you’re like most people, you’ll look for alternative asset classes that help spread out the risk and maximize returns.
Fine art, with its high appreciation potential and low correlations to traditional investment vehicles, seems to fit the bill.
But there’s a catch – access to the high-end art market is restricted to wealthy investors with piles of dispensable cash. For ordinary investors, the world of fine art can be elusive and intimidating.
That’s precisely where Masterworks, an art investing platform, steps into the picture. The platform uses the fractional ownership model to offer retail investors a seamless entry into the exclusive world of fine art.
But how well does the Masterworks fractional investment approach work for portfolio diversification? Let’s find out in this Masterworks review.
Fine Art As an Investment: A Closer Look
In 2022, art sales in the US reached a record-breaking $30.2 billion, with 8% year-on-year growth. In the same year, the world was grappling with supply chain disruptions, rising inflation rates, and geopolitical conflicts.
The novel coronavirus was still a threat, and experts were also predicting a recession in the coming year. The stock market experienced intense volatility, making looking for another asset class a good idea.
Clearly, the contemporary art market is largely immune to macroeconomic challenges. That’s because factors that influence the value of bonds and stocks don’t apply to art.
While economic downturns can affect buying habits and preferences in any market, the value of a painting largely depends on its aesthetics, historical importance, and the artist’s reputation.
Recession or not, a piece by Picasso or Monet will continue to command millions of dollars. For instance, in May 2022, a vibrant Andy Warhol silkscreen portrait of Marilyn Monroe fetched a staggering $195 million.
For people with access to that kind of money, museum-caliber artwork can be a powerful hedge against economic decline and safer than the stock market.
Moreover, data collected by Masterworks shows that between 1995 and 2022, the contemporary and post-war art market has exhibited a CAGR of 12.6%.
As an asset class, it has outperformed S&P 500 investments (9%) and corporate bonds (4.9%).
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The Masterworks Difference: How It Simplifies Diversification
Let’s face it – ordinary investors don’t have access to millions in liquid cash. Between maintaining a respectable lifestyle and saving for retirement, alternative investments like fine art are often seen as out of reach.
Data compiled by The Motley Fool backs this narrative. For ultra-high-net-worth investors, alternative asset classes account for up to 50% of their portfolios.
That figure is a dismal 5% for ordinary investors. Besides high price points, the perceived risks of assets like contemporary art investments also dissuade many.
For instance, to unlock high returns with fine art, you’d have to track how the works of an artist have sold over time to determine whether they’re worth investing in.
In addition, unless you have reliable contacts at art auctions and galleries, there’s always the risk of getting scammed with counterfeit paintings in an unregulated market.
The Masterworks platform for investment makes it easier for average investors to add fine art to their portfolios and harness the benefits of diversification.
To begin with, the company’s research and acquisition experts use a proprietary database of historical art sales data and machine learning algorithms to identify paintings with the maximum appreciation potential.
They keep an eye out for works by established artists, as well as undervalued and emerging artist markets.
The use of data-driven insights minimizes the risk of losses, yielding impressive performance to date. Investing in the fine art market clearly is a good choice.
Next, the acquisition Masterworks team files an offering circular with the Securities and Exchange commission and establishes a limited liability company for each painting.
Securitizing a piece with the SEC eliminates the threat of investing in counterfeit artwork. Plus, it allows Masterworks users to purchase shares of the painting for just $20 each.
They do state a minimum investment of $15,000 but you may be approved for less after your phone consultation. Which means that art investing is possible for anyone.
That doesn’t just make art investments affordable for the common public. It also gives you the flexibility to invest in the works of different artists.
If a specific artist’s reputation declines or their works lose value, you can still earn profits from other artist markets. By buying fractional shares, anyone can start investing in art.
Masterworks Art Investment Returns
But what kind of returns do these investments generate?
On average, Masterworks has paid out 45% annualized returns to art investors across 16 successful exits. In 2022, the platform issued payouts worth $25 million to investors.
As of this writing, even the worst-performing piece, a painting by Warhol, yielded 4.1% annualized returns after a holding period of less than a year. Clearly art investing is a powerful way to diversify your investment portfolio.
It is, however, worth noting that returns from a piece depend on several factors, including demand and supply trends and the holding period. And the minimum investment you make also will affect the returns you make from the Masterworks secondary market.
Masterworks typically retains a painting for up to ten years before selling it and distributing the profits to shareholders.
The company’s private sales specialists monitor art market conditions to select the right exit opportunities.
Occasionally, it can mean selling a painting after a short holding period. Take, for instance, a Simone Leigh piece that sold for a remarkable 325.5% annualized return after a 36-day hold.
That is an amazing return for investing in fine art. And being able to take advantage of experts on the Masterworks team is helpful.
With Masterworks doing all the legwork, you can focus on identifying the right art investments that align with your financial goals.
The data-driven fractional investing approach offers a low-risk and affordable alternative to purchasing museum-worthy pieces outright or to investing in the stock market. Also, strategically timed exits ensure that you don’t have to worry about fine art’s inherent illiquidity.
But what if you’re not willing to lock your money in for a long time? You have the option to sell your shares on Masterworks’s secondary market and convert your assets into cash.
This adds another layer of flexibility and gives retail investors the confidence they need to break into the high-end art market.
How to Invest in Art with Masterworks
Entering the art world from the perspective of an investor has never been easier with Masterworks. Because it offers fractional shares investing, it makes investing in fine art easy for anyone.
And, if you are already an investor with a strong portfolio, this alternative asset investing platform can help you diversify.
Here is how you can get started investing in fine art with Masterworks:
Visit the Masterworks website and request an invitation by inputting your email address
You will then be required to have a phone call consultation with someone from the Masterworks team. They believe in having a one-on-one connection with all their clients.
Once have had the call and are set up, you can start getting access to new pieces that Masterworks purchases and that you can buy fractional shares in.
Each Masterworks share of an artwork cost $20 so you can buy however many shares and just own a portion of the contemporary art piece you want.
The websites states a minimum investment of $15,000 however, you can discuss this and possibly invest less depending on your initial introduction call.
Once you buy shares in the piece you want, you can either sell your shares on the Masterworks secondary market to someone else, or hold on to them for the entire holding period until Masterworks sells the piece.
How the Masterworks Platform Works
Here is the process of the Masterworks art world trading market:
- Masterworks research team of experts identifies artists that have high potential for providing return on investments in the contemporary art market.
- They then look for the right art pieces to purchase, weighing price, potential returns and more.
- They then file an offering with the securities and exchange commission to securitize the artwork. This allows anyone investing in art to purchases shares of the contemporary artwork.
- The fine artworks that Masterclass purchases are held for a specific period of time to maximize investment return. The holding period is usually somewhere between 3 to 10 years.
- You can either hold your shares for the entire time, or if you want to exit early, you can sell your shares to other potential investors on the Masterworks secondary market they provide.
- The Masterworks private sales team works with art collectors and even international investors to sell the piece after the value has risen, providing you with a profit!
Masterworks Fees and Costs
Masterworks has two ways that it makes money as a fine art investing platform. First of all, they charge you a 1.5% annual management fee based on the total value of your account.
This 1.5 annual management fee is actually taken by reducing the number of shares you own, rather than from a cash payment.
In addition, if Masterworks sells an art investment you have shares in after 3-10 years of holding for a profit they get 20% of profit.
This part of the Masterworks fees seem high but there are a lot of fees associated with managing Masterworks offerings and contemporary artworks such as storage, appraisals and insurance, storage and securities and exchange commission fees.
Is Masterworks Worth It?
Yes, if you want to make an art investment but don’t have the cash typically needed for fine art investments, Masterworks is an ideal trading market to try.
Or, if you are just looking for alternative asset classes to build your portfolio and broaden your investment strategy, leveraging Masterworks to get into the contemporary art market will pay off.
The Final Verdict: Is Masterworks Legit for Investing?
If you’re looking for an alternative asset class that can safeguard your portfolio from financial stress, fine art is an excellent option. The Masterworks investment platform is a safe and legit way for potential investors to own shares of fine artworks, even with a small minimum investment.
The Masterworks fractional investment model simplifies the process and makes it more affordable. With consistent annualized returns in the range of high single digits and low double digits, the platform deserves a spot in a diversified portfolio.
However, it’s worth keeping in mind that, like any alternative investment, fine art comes with a few inherent risks and may not be suitable for everyone.
While a platform like Masterworks can help minimize some of those risks, past performance doesn’t always promise future results.
It makes sense to build a strong base of traditional investments before dabbling with the idea of diversifying in the art investing world.