As I’ve been saying in the past articles of this series, diversification can take different forms. Depending on the size of your portfolio and personal interest, diversification can lead into unusual and exciting profit opportunities.#-ad_banner-#

You can diversify with anything that will potentially appreciate in value. There is no need to stick to the traditional exchange-traded products. In fact, use out-of-the-box thinking with truly uncorrelated investments, and you will build the ultimate crisis portfolio.

And a popular, uncorrelated way to add that extra layer of diversified safety onto your crisis portfolio is collecting art. Purchasing art, wine and collectables can also be a great hobby that may open up new worlds for you, the investor.

Here’s a closer look at art as one of the most popular alternative investments…

According to the index Art Market Research’s Art 100, the median price for art has soared 1,066% since 1975 and is up nearly 30% in the past year. Huge numbers have been paid, such as more than $106 million for a Pablo Picasso painting, $90 million for a Chinese Qianlong vase and nearly $11 million for a rare edition of John James Audubon’s “Birds of America.” Not only are art collectors paying attention; financial people are as well.

As a result, art funds have popped up. With an art fund, an investment manager pools money from investors to purchase paintings. In return, the investors receive ownership units in the artwork, with value tied to the underlying art. The leading art fund is The Fine Art Fund, with more than $150 million in assets. The fund is divided into subfunds: old masters, impressionists, modern and contemporary art. It requires a minimum initial investment of $250,000, but it claims an average annual return of 20%.

And although art funds provide investors with professional guidance for choosing and pricing artwork, it’s possible to invest in art independently.

Here are four tips for investing in art…

Buy only what you love
Slowly building an art collection that you love can be a rewarding hobby. Search for the style of art that you personally enjoy and you will become an expert in valuation over time. This self-developed expertise will provide you with the skills to recognize undiscovered, new talent with strong appreciation potential. Don’t expect most of the pieces purchased to grow in monetary value. Rather, enjoy the aesthetic pleasure and education they provide.

  Attend art fairs and auctions
Attend art fairs and auctions that represent your favorite styles. Talk to the dealers and artists to get a feel for the market; observe what’s selling and the sale prices. Not only are these events educational, but there is the potential to build relationships with new and emerging artists who could produce the next hot item in the art world.

Look beyond auction data
Large art auction houses such as Sotheby’s and Christie’s provide the art investor with data from their auctions as a way to price art. However, it’s critical to remember that more than 50% of all art transactions take place outside an auction. These prices are not recorded and are generally not accessible to the public. Therefore, there is a huge gap in pricing data that takes skill and experience to understand.

Be cautious of marketing
Much of the art world is hype. While this hype can drive extraordinary value, it’s easy to become emotionally involved with a painting that you love, and overpay. Be cynical if a gallery owner or auction house pitches an unknown artist as the next Andy Warhol or Damien Hirst.

Risks to Consider: Art is a risky investment market. Although it can provide uncorrelated diversification for your crisis portfolio, the barriers to entry are high on the top end of the market. Only buy what you take pleasure in and what you think will look good displayed in your home.

Action to Take –> Art collecting is a great hobby. If you have the wherewithal, then investing in an established art fund provides the best odds of success in the field. However, it’s exciting, fun and can be financially rewarding to make individual purchases. Just be aware that the odds of finding the next great artist are small.