Some dealers pitch art as an investment that provides diversification away from other asset classes like stocks, commodities and real estate. That can be true, but it doesn't work when all asset classes fall in unison.

The Mei Moses index shows that art prices fell 35 percent in the first quarter of 2009 as high net worth investors battered by the recession and Bernie Madoff sold off their collections, often at fire sale prices.

According to the Financial Times, "The best performing postwar artist, Andy Warhol, saw a decline in the value of his work. A Warhol portrait of Mick Jagger sold for $1.1m in the quarter. The seller bought it in 2006 for $1.5m."

Modern and contemporary art had been appreciating at about 20 percent per year for the past decade and fell 30 percent in the first quarter. Old masters have not been as volatile, appreciating less during the boom years and declining less during the bust. This may be driven by the Wall Street hedge fund manager type's demand for modern pieces when times were good. The older, more established collectors and museums who provide the demand for old masters have seen their purchasing power diminished less by the downturn.

This is a painful reminder of the truth about art collecting: As a hobby, it's great and can provide tremendous non-financial value to collectors. But as an investment, the art market can be illiquid, fickle, and unpredictable -- to say nothing of the insurance premiums associated with owning a valuable collection.


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