- Key Takeaways
- — Masterworks allows you to buy shares in expensive, investor-quality fine art.
- — Investing in fine art can be a good way to diversify your portfolio in an asset that’s not highly correlated with the stock market.
- — Masterworks is a new company and investing in art is risky, so don’t invest more than you’re comfortable losing.
You’ve probably seen clips of those fancy white-glove auctions for fine art. Cultured investors snap up pieces going for hundreds of thousands of dollars, or even a million or more. It’s a favorite investing pastime of the world’s uber-rich, who have enjoyed returns of 5.3% per year and collectively hold around $1.74 trillion dollars in fine art, according to a recent Citi report.
As an industry that’s so grandiose, you might think that investing in fine art is outside of your ability, and unless you’re Bill Gates, it probably is. But that’s where Masterworks comes in.
This first-of-its-kind platform allows people to buy shares of a piece of fine artwork that almost anyone can afford. It’s a simple solution to a tough problem, but there’s also a lot more to consider to see whether it’s a good fit for you or not.
About the Company
Masterworks is a fine art investment platform that lets people buy shares of pre-vetted artwork that will be resold later for a (hopefully) higher price.
It was founded in 2017, so it hasn’t been around for very long. That’s an important factor to consider given that Masterworks plans on holding each piece of fine art it buys for three to 10 years.
Although the company has bought and offered shares in over 40 different pieces since launching, its track record for selling artwork consists of only one painting so far: a $1.5-million painting of Mona Lisa by the famed artist Banksy. It netted a 32% return for its shareholders.
That’s an impressive sum, but it’s important to note that this is the only sale the company has made, so it’s not a good data point to judge the platform’s success. That’ll take more time.
Masterworks platform review
If you’d like to invest with Masterworks, you’ll need to sign up for a wait list. When you fill out the form, it might tell you that there are several thousand people ahead of you. Still, we received an invite within a few hours despite this hurdle.
Upon proceeding through the process, you’ll need to link your bank account, verify your email, and complete a phone interview before you’re allowed to actually invest with Masterworks. This added interview step might be a deterrent for some investors who want a low-key investing experience.
How Masterworks Shares Work
As you might expect, the process of turning a physical painting into shares that many people can buy is a bit complicated. In a nutshell, it works like this:
- Masterworks uses its proprietary model to identify good investments that are currently for sale.
- It buys a work of art and creates an LLC (taxed as a partnership) for each piece.
- Masterworks offers $20 shares (minimum $500) in the LLC until all shares are purchased.
- The company holds onto the artwork for three to 10 years, and then sells it for a profit.
- The LLC is dissolved, and the proceeds are distributed to the shareholders, minus any fees.
Since you’re essentially paying to be a partner in the company established for each painting, you should know that you’ll receive a Form K-1 at the end of the year that you’ll need to file with your taxes.
You won’t have to pay any fees directly since they’re taken out of the eventual sale proceeds, but it’s important to be aware of them. Masterworks is relatively expensive: it charges 1.5% per year, plus a 20% fee from the sale profits. This can cut into your return, significantly.
You might wonder what happens to the artwork after it’s purchased. As you probably can tell, it doesn’t travel around to all of the shareholder’s homes like a traveling trophy (sadly). Instead, Masterworks takes ownership of its safety and care, and even has a gallery in New York where its pieces can be displayed.
Finally, you’ll need to be prepared to hold onto your shares for the long haul. You don’t get any say in when the painting sells. You’re leaving that in Masterworks’ hands. But if you need to exit early, the company runs a bulletin-board-like secondary market where you can list your shares for sale in case another investor wants to buy them. It might not be as straightforward as selling shares of stocks, however.
Masterworks is a unique company unlike any other we’ve seen. Here are some of the things that make it different:
- Invest in art. It’s easy to invest in stocks, bonds, gold, and more. But until now, art has remained a rich-person investment class.
- You don’t need to be an accredited investor. Many alternative investments like this require you to be an accredited investor, which isn’t something the average Joe can do. With Masterworks, anyone can get started in $20 increments with just $500.
- Access to a secondary market. You should be prepared to hold your shares for up to 10 years. But if you can’t, you may be able to find a buyer for them through Masterworks’ bulletin board.
Who Masterworks Is Best For
There’s no two ways about it: Masterworks is a risky investment. The company itself even says “the investment is suitable only for persons who can afford to lose their entire investment.”
There are a lot of dangers in investing in art. Banksy himself — the artist of the only painting Masterworks has ever sold thus far — famously shredded one of his paintings to make a statement against commercialization, after it sold in a London auction house for a lower price than Masterworks’ sold piece.
That said, Masterworks could make a lot of sense for you if you can tolerate those losses. It’s also especially good if you’re looking for a unique asset class that doesn’t track with the stock market.
If the stock market tanks and your portfolio is stuffed full of investments that correlate with it, your whole portfolio could go down with the ship. Investing in uncorrelated assets, like art, can help you keep some of your portfolio’s value in the event of a stock market dip.
Finally, it might be an especially good investment if you’re an art geek, but you don’t have enough time or money to really get into the nuts and bolts of fine art investing on your own. You can always visit “your” painting in a gallery, after all.
Masterworks vs. Other Art Investing Competitors
It’s tough to compare Masterworks to other art investment platforms since there’s really nothing like it. But if you’re looking for alternatives to invest in art, Saatchi Art and Maecenas are a few places to consider.
|How It Works||Purchase shares in artwork that is later sold||Buy and sell artworks directly from artists||Buy and sell shares of tokenized art, similar to Bitcoin|
|Minimum Investment||$500||Depends on the price set by the artist||$1,000|
|Fees||1.5% per year, plus 20% of sale proceeds||Not disclosed||As low as 1%|
|Holding Period||3 to 10 years||None||Not disclosed|
|Secondary Market Available?||Yes||No||Yes|
How Investing in Fine Art Works
Investing in fine art is a different beast than more common types of investments like the stock market, cryptocurrency, or even precious metals. First, it normally requires an extraordinarily large sum that only the world’s wealthiest people can afford to pay, while still staying diversified.
Investing in fine art requires you to keep a firm finger on the pulse of the art market. It’s not as simple as buying a painting you like. For that, you can go to your local department store to get a “Live, Love, Laugh” sign.
To be good at it, you need to know the ins and outs of the different styles, the artists within each style. Plus, you’ll need to know how their artwork has changed over time, the prices that paintings are fetching at auctions, how long they’ve been held for, and more.
It’s an entire industry, and unless you’re an extreme art nerd, it’s probably best left to the professional art investors.
Until Masterworks launched, that is. It uses a proprietary model with over 3,000,000 data points from auction sales to identify which pieces of art are undervalued and likely to rise further. It uses this model to select the investment-quality artwork it offers shares in.
The Bottom Line
Masterworks lowers the barrier for investing in fine art so that anyone with $500 can get started. But that doesn’t mean it’s right for everyone. It’s still a riskier investment than your typical index fund, for example, but if you’re looking to diversify your portfolio away from assets that track the stock market, it could be a good option. Just make sure you’re careful about analyzing how much to invest with Masterworks.