Wine as an Alternative Investment: A Case Study

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Investor interest in fine wine as an alternative asset is growing. It offers low connection to regular markets, consistent returns, and volatility akin to bonds. Investment-grade wine is becoming more and more popular among savvy investors as a means of portfolio diversification.

1. Fine wine outperforms most global equities

Strong returns on investment have long been a feature of fine wine. Over the past 15 years, the unconventional investment has generated a 13.6 percent annualized return. People’s wealth would therefore double around every six to seven years. Look no further than the Liv-ex fine wine indices from 2003. The value of almost all of them has tripled.

Stock markets have not been able to keep up throughout that time, not even during a bull run that lasted ten years. Over the past 15 years, the Dow Jones has returned 7.8 percent annually, or 10.47 percent if dividends were reinvested. The S&P 500 did not do much better, with respective percentages of 8.58 and 10.66.

Not only do fine wines outperform international equities. Additionally, it compares favorably to other real estate investments. Consider the Knight Frank Luxury Investment Index (KFLII), which rates various investment-grade assets. Of its nine asset types, five experienced a negative return on investment in 2020. But not excellent wine. It had an annual return of 13%, which was second only to Hermès handbags in terms of performance.

2. Alternative assets don’t correlate with traditional markets

Keep your diversification in mind. When it comes to preserving wealth over the long term, it is the first lesson investors learn. Your bottom line can be protected from a variety of hazards with a well-diversified portfolio.

Due of its poor association with conventional assets, fine wine is special. At the start of 2020, that was plain to see. Following the Covid-19 epidemic, the Dow Jones and S&P 500 both had first-quarter declines of more than 20%. On the other hand, the Vinovest 100, a private index that monitors 12 different fine-wine markets globally, increased by 1%.

Assets in a portfolio have to have different correlations to the stock market. It lessens the risk. In fact, selecting a diverse selection of stocks, bonds, and mutual funds does not constitute a well-diversified portfolio. The same recurring risk factors affect these assets. When the stock market declines, someone may lose money due to inflation, interest rates, liquidity, and inherent risk.

Fine wine presents significantly different hazards. Inflation and interest rates are unimportant to fine wine. Instead, consumption patterns and the dwindling availability of vintage wine have an impact on wine prices. Fine wine survived the past recession whereas conventional investments failed to do so because of this.

3. Fine wine has low volatility

A wine grows less volatile the longer you store it. This is a result of an unbalanced supply and demand. Simply said, the supply curve for a great wine is exactly inverted and gets more prominent as more people drink it.

Fine wine has volatility levels similar to bonds. Even when traditional markets are under transition, it remains stable and steady. Just take a look at how volatile the benchmark stocks are compared to the Liv-ex Fine Wine 1000 Index. One appears to be a roller coaster, while the other appears to be a short hike.

Investors may experience greater peace of mind when volatility is low. People don’t need to be concerned about “timing the market” or their portfolio’s value fluctuating drastically. Fine wine shares cannot be traded publicly, so investors are spared the turbulence that comes with open markets.

4. Wine consumption is at record levels

People enjoy wine, that much is obvious. Americans drank more than one billion gallons of it in 2020. Since 1996, American wine consumption has doubled, becoming the first country to cross the ten-digit mark.

Reds and whites are in high demand worldwide, not only in the US. More investors and consumers of fine wine are now present in Russia, Asia, and other emerging countries as a result of rising global wealth. The demand for investment-grade wines is “unprecedented,” according to Investing in Liquid Assets.

Demand should only grow over time, particularly for well-acclaimed vintages. Why? because as wine is consumed, the supply will decrease. Every time that occurs, one bottle is removed from circulation, increasing the rarity and cost of the remaining bottles. The imbalance between supply and demand is classic.

Consider Screaming Eagle Winery. Only 500 to 850 cases are produced annually (6,000 to 10,000 bottles). estimates that the average bottle costs $4,160. The cost of the cabernet sauvignon increases as more bottles are consumed by consumers. It explains why the 2015 vintage costs $100 higher than the 2016 vintage despite both receiving a consensus score of 97 from critics.

5. You have tangible ownership

Due to the fact that tangible assets are, well, tangible, some people favor investing in them. You can enjoy the beauty of Monet’s Water Lilies or a 2015 Châteaux Margaux with friends. You are the actual owner of the thing. Every bottle in your wine portfolio would still be yours even if the wine investment company went out of business tomorrow. A paper asset is what you get when you purchase a public investment like a stock or bond. You don’t actually possess it.

Additionally, all you need to do to properly appreciate your investments is pour it into some elegant glasses. Your Anheuser Busch InBev or PepsiCo stock cannot be regarded to be in the same situation.

A developing alternative asset class with little link to stocks is fine wine. Not only is it less volatile than the stock market, but over the past few decades, it has also outperformed it. Many investors are turning to wine investing for fun, rewards, and social currency despite the fact that there are a unique set of dangers, such as decreased liquidity and storage or insurance fees.

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