Like most alternative assets, fine art has had its ups and downs. But over the last 10 years, the major art index has outperformed the S&P 500 -- sometimes spectacularly so. In 2008, a year in which the S&P 500 took a 40 percent haircut, the art market dropped a mere 4.5 percent, according to the Mei Moses World All Art Index, the preeminent long-term value index of fine art.
While the index has underperformed in recent years when compared with the major equity indexes, the compound annual growth rate of the Mei Moses World All Art Index over the last decade is 7.4 percent. That's 0.4 percent higher than the S&P 500 through the end of 2012.
For most people, this wouldn't have mattered 30, 20, or even 10 years ago, as the art world has historically been open only to the ultra-wealthy and well-connected. But in recent years, the barriers have come down, and while art is by no means a low-cost investment vehicle, more people than ever are getting into the collecting game.
So is art a good complement -- or even an alternative -- to your stock portfolio?
Getting Started as an Art Investor
Anyone looking to invest in art has two options: outright ownership or investment through a managed fund. If you have the eye and pocketbook to go it alone, you can find works of various
prices, styles, and media on websites such as Artnet.com. "Winter Cabin," for example, a painting by contemporary artist Aron Wiesenfeld, goes for $20,000. If you have more capital to deploy, take a look at Howard Terpning's "Lot 120: Scout Report," yours for $977,000.
If picking the next Damien Hirst sounds too much like a crapshoot, there's another option: putting your money into a fund that pools clients' capital to invest in art. Understand that even though it is a managed fund, this is not the same as buying shares of a Vanguard index. Art is fundamentally illiquid and risky. Plus, this hands-off approach isn't cheap.
For example, Kansas City-based The Collectors Fund has a $250,000 minimum investment requirement. The fund's managers claim it has earned 20 percent annually since inception, though much of that is yet to be determined, as art turnover can take many years -- or even until the fund closes.
Another possibility, though still in development, is the Liquid Rarity Exchange. This company, based in St. Louis, aims to fully securitize highly valuable, non-replicable assets. The company is working with the NYSE to offer stocks and funds that represent an ever-shifting art market and its players.
Of course, buying into an art fund won't put an Old Master over your fireplace, which is why dabbling in the arts with your money on the line requires a different sort of frame of mind.
Buying Art Versus Investing in Art
Even though art comes with a price tag (and an entire industry devoted to determining values for collectors and investors), it is, in the end, a subjective pursuit. So it's crucial to understand that these investments often come with more opacity and require a different kind of due diligence.
World-renowned street artist and activist Banksy has pieces that range from $5,000 to $250,000. One of his lesser known, lower-priced works, "Sepia Morons," is for sale right now at just more than $7,600. That may sound like a bargain for a big-name artist. But it's only a "bargain" if collectors continue to support Banksy's work and influence as time goes on. Its future value is anything but certain.
If you sense that its value is dropping, it's not so easy to unload a painting or sculpture as it is to liquidate your position in a stock. So buying "Sepia Morons" should be, first and foremost, an act of love for the piece itself or perhaps its creator. A prospective art investor should think of this avenue as an investment in the arts and humanities -- a celebration of talent and vision. Monetary gains are a bonus.
As art advisor Lisa Schiff told Forbes, investing in art is "1,000 percent about timing, and you have no idea what will happen in the future."
The availability of fine art to the masses is still a fresh concept, and many elements remain to be seen. The big auction houses may hold art as a means of making money, and there's a chance you can, too. Just don't think your key to retirement lies in a Jackson Pollock (unless you find it at a yard sale).
So if you've got the art bug, shop some pieces online and take a stab at determining their values among collectors. At the very least, you'll learn something and have a great conversation starter for your next cocktail party. And you never know what you might find, or what it might be worth in 10 years. Just be sure it's something you're proud to hang over the mantel in the meantime.
Michael Lewis is a Motley Fool contributing writer.
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What do success stories like Henry Ford, Steve Jobs and Mark Zuckerberg have in common? They all made their mark (and their millions) by coming up with a better idea and running with it. Starting a business is a proven path to wealth, and the best way to get there is to start small and scale up -- which usually means being bought out by a larger company, selling franchises or licensing your product.
An ambitious goal is critical if you want to expand your business, says Barbara Findlay Schenck, a small-business strategist and author of Selling Your Business for Dummies.
Before you apply for loans or sign up investors, polish your business plan. And don't overlook sources of free help. For example, you could tap your alma mater's alumni network for potential mentors. You can also get advice from more than 13,000 small-business volunteers through Score, a nonprofit organization supported by the Small Business Administration. (For more, see Six Steps to Starting Your Own Business.)
Risk level: Medium
Creating a product and licensing it or selling it through retailers is another route to making money from your good idea.
One of the biggest mistakes that aspiring inventors make is to create a product before they've determined whether there's a demand for it, says Sidnee Peck, who teaches classes in entrepreneurship at Arizona State University's W.P. Carey School of Business. She encourages her students to talk to potential customers in person before they develop their products.
Nancy Tedeschi came up with the idea for SnapIt, an eyeglass-repair device, after her mother used an earring to jerry rig her broken glasses. Convinced that she could improve on the tiny tools contained in most eyeglass-repair kits, Tedeschi invented a small screw with a snap-off extension. Tedeschi got the attention of Walmart (WMT), the nation's largest retailer, by entering its "Get on the Shelf" contest, an "American Idol"-like competition for aspiring entrepreneurs. She was one of two runners-up, and her product is now available on Walmart.com.
Online surveys and social media provide an easy way to reach a lot of people, Peck says, "but you don't get to see people's eyes light up." Tedeschi also attended housewares and hardware trade shows, where she introduced her product to representatives of other big retailers. Those contacts helped her get SnapIt on the shelves at Walgreens (WAG) and Ace Hardware.
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You can make a lot of money fixing up run-down houses and selling them for a quick profit, but you need cash to venture into this business. It's tough to get a mortgage for a property you plan to flip, but a home-equity line of credit against your primary home is a good source of funds for first-time flippers. Short-term bridge loans from private lenders, known as hard-money loans, are a higher-risk way to get the cash -- and charge higher interest rates.
Look for ugly ducklings in upscale neighborhoods where the market has picked up. Before buying a property, research recent sale prices for nearby homes to get an idea of what you can make, and find out how long the homes were on the market. Successful flippers usually sell their properties in 30 to 60 days, says Letitia Patterson, a real estate agent who has invested in properties in the Detroit area.
Don't forget to factor in the expenses you'll incur while you're holding the property, along with closing costs. Justin Pierce, a real estate investor who flips properties in the Washington, D.C., suburbs, says he starts by estimating the sale price of a fixed-up home. Once he comes up with that number, he subtracts buying and selling costs (typically 10% to 15%), a profit margin of 15% to 20%, and the cost of repairs. With those numbers in hand, he can determine how much he will offer.
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The average interest rate for a 30-year, fixed-rate mortgage on a rental property is only about 4%, according to mortgage Web site LendingTree. That means your monthly rental income should cover the mortgage, which wasn't possible when rates were 7% or higher, says Michael Corbett, an adviser to the real estate Web site Trulia and author of Before You Buy! Plus, the National Association of Realtors projects that average apartment rents will increase 4.6% this year, following a 4.1% increase in 2012.
Once you've purchased your first property, you can use the equity to buy additional properties, typically through a cash-out refinancing, says Doug Lebda, chief executive officer of LendingTree. Most lenders won't let you take out more than 80% of the equity you have in the property.
Fayz Khan, a former auto engineer, ventured into the rental market in 2008 because he believed he could earn better returns in real estate than he could get from the stock market (see "What It Takes to Be a Landlord,"). He now owns eight rental properties in the Baltimore area, and the return on his investment has far exceeded his initial expectations. Khan and his business partners are exploring opportunities in North Dakota, where the oil boom has led to an acute housing shortage.
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You don't need talent or money to cash in on YouTube. In fact, all you need is a camera, something unique to share and plenty of luck. "A lot of people make over six figures a year on YouTube," says Ross Ching, a commercial and music video director.
A good one-off viral video is under three minutes and it gets you hooked within the first ten seconds. But it's tough to be a one-hit wonder. A more reasonable goal for amateur filmmakers is to score viral fame with a YouTube channel. That means making a series of videos, each of which can run a little longer than three minutes. Try highlighting a specific skill or theme -- say, cooking or standup comedy. Your videos will drive traffic to one another while you perfect your craft and earn "subscribers."
Reach out to media outlets and bloggers with a link to your video. Don't expect your audience to find your video without some direction. A link-back on a popular site can skyrocket views.
You can earn cash with YouTube advertisements, which can run about $2 per 1,000 views. But the real money is in endorsements and product sales. Industry experts estimate that Korean pop star Psy earned about $8 million in 2012 from his addictive YouTube music video "Gangnam Style." As his video accumulates views, his single racks up iTunes downloads and he picks up lucrative contracts, such as his pistachio-promoting Super Bowl commercial.
Risk level: High
If you can withstand 12-hour workdays on an oil rig in the North Sea or maintain your composure during military coups, you may be rewarded with free housing, a six-figure salary and the chance to see the world.
According to Rigzone, an oil and gas industry data provider, entry-level workers on a rig earn more than $68,000, on average; the pay ratchets up dramatically as you gain experience, which is easy to do in an industry that believes heavily in on-the-job training, says Rigzone president Paul Caplan. Drilling positions are most lucrative, with an average salary of $126,471.
If physical labor isn't your thing, you could get a gig with the State Department. The harsher the environment, the better the incentives: Foreign Service jobs add up to 70% of base salary for certain field positions in Iraq and Afghanistan.
A bonus: Hardship posts in a remote locale afford few opportunities to spend -- so there's not much to do with your money but watch it grow.