Art as investment: an old debate, rekindled

As portfolios plummet, uncertainty increases, and paper wealth vanishes overnight, some investors may be longing for assets they can touch.

Like a fine diamond, a Salvador Dali etching or a Qing Dynasty vase now gives its owner the added security that its value won't soar or crash with the Nasdaq index.

No one is rushing to convert stocks to Old Masters' paintings, an action that experts say would be ill-advised. And the art market itself is facing uncertainty.

Still, art lovers might now consider stepping up their hobby a bit - with an eye on economic as well as aesthetic value.

"When people could get a 20 percent return on their investment in the stock market, the appeal of art was not as great," notes Graham Arader, owner of Arader Galleries in New York. His inventory includes Audubons, Hudson River School painters, and rare maps and books.

His business has spiked sharply in the past month.

Nearly everyone, from art experts to gallery owners to financial advisers, emphasizes that "investment" should never be the sole - or even the primary - reason to buy art.

"The reason you collect art is because you love it, you understand it, and it's going to enhance your life," says Robert Mnuchin, a longtime collector of abstract expressionist art, owner of C & M Arts gallery, and a former partner at investment brokerage Goldman Sachs.

That said, however, he acknowledges that the modern works he deals in are "assets." "It's not about taste or discovery, it is art where the artists and their careers are very established," he adds. Their values fluctuate, "but that's different than buying art today that may have no value tomorrow."

As the big November auctions that mark the real start of the fall season begin tonight, experts are hesitant to make predictions about which way sales will go.

The art world is collectively holding its breath, waiting to see how the auctions, traditionally the market's bellwether, succeed.

"There's concern, nervousness, but there's also a reasonable degree of optimism," says Bruce Wolmer, editor in chief of Art & Auction magazine, based in New York.

"I've never seen a situation in which uncertainty and countervailing evidence" has been so strong, he adds. "Any argument you make has a certain validity."

The art market sometimes runs counter to the stock market - as it did in the late 1970s and after the 1987 crash - since some collectors see tangible assets as a safer place to put their money. "On the other hand," notes Mr. Wolmer, "they make a rational judgment: My portfolio is down such and such. Do I really need that extra $5 million painting?"

Added to those economic factors are many psychological ones: For some collectors, buying a work of art is the equivalent of comfort food. For others, it may be hard to imagine returning to such activities as the turmoil from the terrorist attacks plays itself out.

In certain markets, such as Impressionist and modern pictures, scarcity becomes a factor as more works are snapped up by museums.

And "[there are] hard-core collectors who will always keep the market going," notes Victor Weiner, director of the Appraisers Association of America. "They'll be out there in full force, even more committed because they think they're going to get bargains. It takes cataclysms to keep them away from the art market."

Mid-priced art - which is not as safe as an investment, and stands to be bought by those who may have suffered more from the economic downturn - may suffer the most, says Mr. Weiner.

Some collectors may also be more hesitant to buy contemporary works, where no resale value has been established.

Of course, not everyone buying art now thinks of it as an asset. In the wake of the terrorist attacks, some gallery owners report an increase in people who simply have a desire to reconnect with something beautiful.

"There's a different tone," says Martha Fleischman, president of the Kennedy Galleries. "People are saying, 'I love this work of art, and I'm going to enjoy it.' " She recently sold a Rockwell-Kent print, for instance, for $1,500.

For those who do invest in art, and want to be sure that their money isn't being wasted, experts have some advice: Buy what you like, buy the best that you can afford, specialize, and understand your field. And don't count on making a big profit.

"The problem with art as an investment is the transaction costs eat you up," says Sam Pennington, publisher of the Maine Antique Digest.

Some collectors may be lured by tales of huge gains made when an out-of-favor piece suddenly became fashionable, but those instances are rare, he says.

Buying such unknown works can be as risky as day-trading stocks. Wiener notes that when the art market turned down in the early 1990s, many contemporary prints fell to one-fifth their value.

But for people who truly love art, and have some extra money, collecting may be one more way to diversify their holdings.

"Why not buy things you like and can enjoy ... and perhaps have a very pleasant surprise?" asks financial commentator and author Jonathan Pond. "Don't use art as a replacement for the old-fashioned ways we prepare for retirement," he says.

"But there's no reason you can't develop a hobby which could potentially be financially remunerative."