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Is art a safe haven?

By Judy Martel · Bankrate.com
Monday, November 19, 2012
Posted: 6 am ET

Both buyers and sellers of art have been invigorated by an uncertain economy teetering on the brink of the fiscal cliff, the Jan. 1, 2013, date when automatic spending cuts and tax hikes go into effect.

With capital gains rates uncertain next year, some sellers are worried that the rate for collectibles will go up from the current 28 percent level and are putting works of art up for auction now. And the recent record sale of contemporary art at Sotheby's -- $375 million, including a Mark Rothko painting that sold for $75 million -- proves that there are plenty of collectors seeking an alternative investment to the volatile stock market.

But investing in art as a hedge against a traditional portfolio of equities and fixed income is not as simple as buying a painting or two. Art is a tangible asset and that means it's illiquid and should be treated as a long-term investment. "Stocks and bonds can be disposed of quickly in the marketplace," says Dorit Straus, worldwide fine art manager at Chubb Group of Insurance Companies, "but you can't do that with art."

In the world of art, form follows fashion, adds Straus. When you're ready to sell your Matisse, buyers could be flocking to de Kooning. For instance, while the Sotheby's contemporary art auction was hot, it ran cooler for the previous week's sales of modern and impressionist art. "With art being at the whim of fashion and trends, you at least want something you'll enjoy having on your walls," she says.

Even as a long-term investment, the limitations of owning physical art should not be underestimated: Storage and maintenance expenses, insurance and the cost of auction fees or sales commission must all be factored in when calculating return.

For those who want the diversification without the challenges of owning physical art, an art fund could be the answer. Since they're not traded on an exchange and they use a variety of investment approaches, make sure you investigate them carefully. And if you're looking purely for commodities to round out your portfolio, there are also other funds to consider, such as those holding precious metals or energy.

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