There is one pertinent question frequently asked by both new and seasoned collectors of fine art and antiques. What should your total investment portfolio’s asset allocation be to these intriguing, alternative assets? Is there a percentage that is too high? Is there another that is too low? Is it possible to calculate any “right” number at all?
If you listen to the advice of conventional financial advisors the number should be zero. They apparently don’t believe that investment quality art and antiques exist. But I suppose I shouldn’t blame them. After all, they’ve probably never seen a collection of ancient Greek electrum coins struck in stunningly high relief or a room full of brilliantly colored, medieval French illuminated manuscripts. But, this doesn’t mean I can condone their uninformed opinion presented as authoritative truth. Investing ignorance is an ugly thing.
If you’ve found your way to the Antique Sage website, there is a good chance you are fed up with the conventional wisdom of mainstream financial managers. I know I am. So you won’t be surprised to hear that after 14 years in the financial industry, I have come to a somewhat different conclusion. I think that art and antiques are an indispensable asset class that belong in almost every well diversified portfolio. There is only one question remaining in my mind. How much should you own?
Let’s start with examining an appropriate lower bound for art allocation in a portfolio. In my opinion, 2% is the magic number here. Why 2%? Because once you drop below this threshold, any contribution art can make to your bottom line is minimal.
Think of it this way. At a 2% allocation, your art or antique collection would have to increase in value by a robust 50% before it would even contribute a scant 1% increase to your overall investment portfolio. To believe you can dedicate less than 2% of your investment portfolio to art and still have it meaningfully impact your future investment performance is simply unrealistic.
The maximum asset allocation for art and antiques, on the other hand, has other factors at play. Art produces no income in the form of dividends or interest. It is also usually highly illiquid, with a relatively wide bid-ask spread. This can make it difficult to sell pieces quickly for fair value. Although they sound bad, these attributes are not completely negative, as I lay out in my article titled “Illiquidity – The Unlikely Ally of the Art Collector“. However, these two attributes – no income production and illiquidity – are the primary factors limiting the amount of your portfolio that can be safely dedicated to art and antiques.
As a rule of thumb, I consider 25% to be a reasonable upper bound for the asset allocation of art in an investment portfolio. This assumes that the rest of the portfolio is well diversified between stocks, bonds, real estate and cash. Keep in mind that this upper limit is only a guideline, though. Many people might be comfortable with a lower percentage, like 5%, 10% or 15%, and I certainly have no problem with that.
I can also foresee a special situation where one might want to consider going above the 25% asset allocation boundary for fine art and antiques. For example, an extreme overweight might be appropriate in an environment where one or more of the traditional asset classes – stocks, bonds or cash – have zero or negative expected long-term returns. Unfortunately, as of early 2017, it appears we are living in just such a time.
Right now two out of three of the traditional asset classes – stocks and cash – have little realistic prospect of returning significantly more than zero over the next decade. Because of this it might make sense to substitute art for a portion of one of these underperforming asset classes. In this case, I believe swapping an investment grade art or antique collection in place of some stocks is a logical conclusion. However, adopting an unconventional strategy like this would require that the cash portion of your portfolio also be increased simultaneously to help offset liquidity risk.
I honestly believe that a healthy 10% or 15% asset allocation to investment quality art and antiques is a necessity in the present age. The future returns on traditional paper assets are likely to be very disappointing going forward. Art and antiques are perhaps one of the few places left where an investor can hope for a solid 5% return or better over the next decade or two. While an art allocation between 2% to 25% is normally ideal, in light of the current investing environment, I could see a savvy connoisseur of fine art and antiques safely increasing his allocation to 30% or even 40% of his investment portfolio.
