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All SMSF’s should consider holding Art & Collectables

I’ve read dozens of articles and heard from even more financial experts why holding Art & Collectibles in your SMSF is a bad idea. Usually the arguments run along lines of its too risky; not a great return; not what SMSF’s should be all about etc. However, I think the articles and the experts are wrong. I’m not going to give financial advice, but I’ll make my argument nonetheless.

Art & Collectables are just another asset class.

We all hear and know the arguments around diversification when it comes to building an investment portfolio. Whether its having a portfolio of at least 20 listed stocks or being in an Index fund etc, the idea is to spread your risk around various assets to minimise the chance that one major asset loses value and destroys your portfolio. Therefore doesn’t it follow that the asset class of Art & Collectibles actually enhances the diversification strategy? At end of day almost every other asset class has some correlation i.e. stocks move in similar waves etc. Doesn’t this make art & collectibles an ideal addition to a well balanced portfolio? (assuming of course you don’t overweight in it!).

The investment return.

It’s argued that the returns on Art & Collectibles are not as reliable – too risky. Yes Art & Collectables is highly subjective but this doesn’t mean it’s a bad thing – it just has to be recognised. In my layman’s view ‘subjectivity’ equates to ‘volatility’. Therefore because you have high degrees of volatility you need to compensate with higher returns. A casual observation of my clients portfolio’s suggests this occurs. Plenty of their portfolio’s go down in value (some portfolio’s really crash down – although no worse than a share-market collapse) and some go up in an extraordinary way in a very short space of time. Volatile space: high risk / high reward. This doesn’t mean it’s a bad investment; it just is what it is.

In my view the key issues to deal with are:

Don’t forget the costs: You need to factor in the purchase price and on-going annual costs (storage and insurance) before you make your decision to buy. Give the nature of storage and insurance (high initial cost but low marginal cost i.e. the cost gets cheaper the large the holding), my advice is to go into this space only if you plan to hold a reasonable sized portfolio. However you need to balance the size of your portfolio against all the other assets you have in your portfolio.

Its subjective: like all asset classes you can make your own decisions, but because the Art market is subjective there are plenty of experts that can help you choose art with higher likelihood of appreciation. Try to reduce your volatility / risk by using the experts to guide you. Remember, just because you like a painting doesn’t mean everyone else will (and after all it’s about demand and supply).

As one last observation, what would the investment market prefer? Perhaps there is an optimal half way house – a clever Asset Manager could create an Art Fund. Then investors can buy into the fund (which is itself diversified). The Fund can buy, sell and rent art – all while paying for a panel of experts to help make the critical buy, sell and rent decisions.

In summary, Art & Collectables should not be discouraged at all. In fact I’d argue that a well balanced SMSF should actually consider Art & Collectables. It adds diversification, and if done well can add some spice to your fund. Yes it’s risky, but there are steps you can take to minimise your risk. What do you think? I’d love to hear from you if you agree with me or think I’m dead wrong.