Art investment is a risky business. Even “insiders” such as auction houses, art dealers and experienced collectors make mistakes and sometimes lose money on what they consider to be ‘investment grade’ art. On the other hand, returns can be very high, making art investment a potentially high return, but risky enterprise.The centre of the art investment market tends to cluster around financial centres such as New York and London and a lot of interest tends to be focused on art that meets the ‘Goldilocks’ principle of being in the middle: not too old that it is considered an antiquity, which often raises issues of heritage, ownership and fakery and not so contemporary that it hasn’t appeared at a major auction house.In this middle ground, there are a number of factors that can help to reduce risk. Artists that have stopped producing (bluntly artists that are dead) are often less risky than those that are alive for the simple reason that the supply of art is well-defined (although not perfectly so because of the possibility of new works coming to light and of forgeries). Researching the track record at auction and establishing provenance including things like history of exhibition and proof of ownership by an expert and establishing marketability (and hence liquidity), all help to reduce risk.However, being in the middle also means that there is a lot of demand, and hence prices can already be high which reduces the potential for future returns. Given this, a number of galleries have another approach to investment art, which is to target the less well-trodden area of established and emerging contemporary artists who haven’t yet established a track record at major auction houses. As with the middle ground of art investment, there is risk, but there are steps that can be taken to help reduce these risks. Different art galleries have different approaches, and whilst none are unique, there are methods that you can learn from and use yourself as part of your own due diligence process.Example criteria that can be applied are restrictions on artists by background (e.g. having to have formal training or studied in a certain ‘school’ of art), had a certain number or type of exhibition (e.g. solo shows or international exhibitions), track record of selling art in some way, some inroads into the secondary market. Other criteria might include using in-house art consultants to review the work to ensure that it of sufficient technical merit and checking on the level of supply of the artist. If you ask about the gallery client list and find out whether it included high-profile private collectors, this will help you to gain a sense of the ‘reality’ behind pricing as the judgment of high-profile collectors tends to reflect the market value of the work. Amongst the various approaches there tends to be a common strand of using techniques to ensure that supply is measured, that art is of a certain quality, that there is some track record of price increases and that there is some form of secondary market. Whether you are buying at auction, through a gallery or in the secondary market asking quetions about the criteria used above will help you judge whether your investment in art is more or less likely to make money.As with any investment, there is no guarantee of appreciation – be it shares, property, fine wine or art. However, a number of studies have shown that art investment compares very favourably to other investment assets over the medium to long-term time period (i.e. 10 years plus) and that art can offer a diversification option in a mixed portfolio. For certain clients, it has the additional advantage of being a very portable investment and being a store of value.There are a number of tips to investing in contemporary art available on the web. Here are my 7 tips to add to the mix:Realise all art investment is risky. Think about this carefully as contemporary art is even riskier -what level of risk you can handle and what you can you do to minimize the risk.Educate yourself as much as possible. Read art magazines, visit exhibits, meet artists (particularly if you are going to buy their work). Galleries will provide biographies of artists – check these to see how many exhibitions they have, who they have sold to and what sort of training that they have had (either formal or informal). Get an idea of what is included in biographies by looking at any other reputable online art gallery.Art markets tend to be illiquid so if you want to sell be prepared that if you take your time and do it the right way (talk to other collectors, the artist, the gallery that you bought it from etc.) you are likely to get a better price.Be prepared to hold art for the long run. Ideally, you should hold contemporary art for at least 5 years.Check out supply levels. The more art that is available, the more demand has to be for the secondary market to be likely to function in your favour if you are looking to sell your art.Only purchase art that you enjoy viewing and buy at least in part for the joy it gives you and your friends and family. Factor this enjoyment into the ‘return’ on your investment. Of course, you want your art to go up in value – but if you like it and it adds value to your life, it helps to offset the risk of holding it.Finally, whilst known names may make you feel that you have a sense of guarantee on investment, if you look back at the history of art it’s often not the case: artists and artistic styles come in and out of fashion. Purchasing works that you enjoy by upcoming artists and watching them grow offers financial upside and is a rewarding experience. Consider as much information as possible and then go with your instincts, particularly if you like a particular piece of artwork.(c) James Grayling and the British Art Gallery, 2011