Stocks and bonds may dominate your portfolio, but now could be an excellent time to savor the potential of fine wine investments.
Since 1900, wine investments have outperformed cash, government bonds and real estate, according to Credit Suisse. On average, wine boasts an inflation-adjusted price appreciation of 3.7 percent annually, compared to 2.9 percent for the collectibles class overall.
Current market conditions may produce a surge in wine investments.
“Higher valuation levels in equities, alongside headwinds of increasing interest rates and inflation on the bond market have increased investor interest to find unique sources of return and risk available in alternative investments,” says Ben Porras, financial advisor at EP Wealth Advisors in Los Angeles.
[See: 8 Investing Do’s and Don’ts During Market Volatility.]
Fine wine offers investors the benefit of low correlation to traditional asset classes, such as equities and fixed income, as well as lower volatility in pricing, says Mark Busher, market director of investments at Hawthorn, PNC Family Wealth. Despite unfavorable weather conditions in Europe resulting in the lowest global wine production in 60 years in 2017, wine prices are on an upward climb.
“In the last two years, prices for premier Burgundies have risen 15 to 25 percent,” Busher says. New buyers, particularly Asian investors, continue to flock to the market, driving prices up further. “Since the supply of fine wine is relatively fixed from vintage year to vintage year, prices are likely to stay elevated.”
A strong outlook is appealing if you’re concerned about rising interest rates diminishing bond yields and elevated consumer prices taking a toll on stocks.
“Since wine is a storable commodity whose demand is linked to economic activity, it has the potential benefit of diversifying against unexpected inflation,” Porras says.
If you’re tempted to sample wine investments to counter market volatility, keep these rules in mind.
Set a realistic benchmark for returns. Measuring true returns for wine investments can be difficult, says Rob McMillan, executive vice president and founder of the Silicon Valley Bank Wine Division. “Seldom do analysts know a seller’s purchase price or the date of purchase. Transactions don’t occur as often as publicly traded stocks and getting a handle on transaction costs is difficult,” he says.
Over the past year, McMillan has seen reports suggesting wine returns as low as 4 percent and as high as 25 percent. If you’re trying to pin down how well wine will perform in your portfolio, he says something less than 8 percent would be a believable return.
The advantage wine offers in terms of predictability is that over a long time period, “any given producer’s vintage will be consumed, which in theory should reduce supply and increase price,” McMillan says.
Remember, however, that you’re playing a long game with wine, so it may take time to see an investment bear fruit. It’s also a less liquid option than other investments.
“One of the greatest selling points of the stock and bond markets is liquidity,” says Robert R. Johnson, principal at the Fed Policy Investment Research Group in Charlottesville, Virginia. “The bid-ask spread is small for listed stocks and bonds; the bid-ask spread for wine is much larger.”
Weigh quality against quantity. A wine’s vintage and region are two of the strongest predictors of return performance and it’s to your advantage to be selective.
Johnson recommends investing in the most established French Bordeaux wines, “as they’re much more likely to retain their value, particularly in times of financial stress.”
If you prefer to spread your investment dollars across multiple wines, remember to balance the risk.
[See: 7 Classic Inflation Hedges and Their Thorns.]
“Similar to diversifying investments in stocks, diversifying strategy in wine would also be advisable,” says Oscar Henquet, estate director at Rudd Oakville Estate, a northern California wine-grower. “Producers and growing regions with a long-standing pedigree will be a safer investment, whereas emerging wine regions and producers might be riskier, but potentially yield higher returns.”
Busher says investors must keep cash flow considerations at the forefront when deciding how to allocate wine investments.
“Investors in fine wine must ship, store and, in many cases, insure, their investments,” Busher says, and the annual cost can be substantial. For that reason, investors should avoid buying indiscriminately and instead, “do research on proven wine producers with a track record of strong price appreciation.”
Doing so can help you pinpoint wines that may offer the best returns, while also avoiding fraud.
“Wine appreciation has brought some bad actors to the market pedaling good or even mediocre wine bottled under marquee labels,” Busher says. “Buying from a respected importer or dealer is a great way to help limit your downside.”
Keep an eye on the global market. Trade war talk may have you worried about the stocks in your portfolio, but you should also consider the impact to the wine trade.
“Theoretically, a trade war would potentially have several effects: change the wine-growing regions that are investment-worthy, increase the price of wines that are already part of an investment portfolio due to the more rarefied nature of that wine in particular markets and decrease demand for current release wines subject to adverse trade policies,” Henquet says.
That’s a worst-case scenario, but one you must consider when investing in wines. Limiting your exposure to wine is a good way to hedge against the potential fallout associated with a trade war.
“Most financial advisors suggest that collectibles should represent less than 10 percent of an individual’s total assets,” McMillan says.
He also cautions that while wine can act as a buffer against inflation, it’s not immune when a recession takes hold.
Between 2008 and 2012, retail wine prices overall declined sharply as many wineries discounted offerings to combat a sales slump. Select premium regional wines went against the grain, managing to maintain consistent pricing, but they were the exception and not the rule.
[See: 10 Investing Tips for Busy People.]
Household wealth is currently experiencing a boom and after some bumps early in the year, the market is humming along steadily. You need to be prepared, however, for the inevitable shift in the current market cycle from bull to bear.
“A problem with looking at alternative investments for downside risk protection in bear markets is that increasingly, the correlation across asset classes rises substantially,” Johnson says. “Essentially, investors don’t get the diversification benefits at precisely the time that they need it.”
If a repeat of the 2008 financial crisis were to occur, liquidating wine investments may be difficult. Preparing for this type of situation is essential.
McMillan says the best course of action when venturing into collectible wines is to employ the help of an expert who can “help develop a personal plan to time the exit of each wine investment.”
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Is the Time Ripe for Wine Investing? originally appeared on usnews.com
