The Strong Case for Wine as an Alternative Investment The non-traditional investment has yielded a 13.6% annualized return over the last 15 years.
By Anthony Zhang •
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Fine wine is gaining steam among investors as an alternative asset. It offers a low correlation with the traditional markets, steady returns and bond-like volatility. Savvy investors are increasingly turning to investment-grade wine as a way to diversify their portfolios.
Here are five reasons why.
1. Fine wine outperforms most global equities
Fine wine has a long history of strong returns on investment. The non-traditional investment has yielded a 13.6% annualized return over the last 15 years. That means people would double their money roughly every six or seven years. Just look at the Liv-ex fine wine indices since 2003. Nearly all of them have tripled in value.
Even amidst a decade-long bull run, stock markets have not been able to keep pace in that time. The Dow Jones has registered a 7.8% annualized return over the last 15 years or 10.47% for people that reinvested their dividends. The S&P 500 didn't fare much better at 8.58% and 10.66%, respectively.
Fine wine doesn't just outpace global equities. It also stacks up well against other real-asset investments. Just take a look at the Knight Frank Luxury Investment Index (KFLII), an index that measures various investment-grade assets. In 2020, five of its nine asset classes had a negative return on investment. Not fine wine, though. It returned 13% for the year, the second-best performance only behind Hermès handbags.
Related: Why Is a Luxury Home a Better Investment?
2. Alternative assets don't correlate with traditional markets
Don't put all your eggs in one basket. It's the first thing investors learn when it comes to long-term wealth preservation. A well-diversified portfolio can protect your bottom line from various risks.
Fine wine is unique because it has a low correlation with traditional assets. That was on full display at the beginning of 2020. The Dow Jones and S&P 500 fell more than 20% in the first quarter in the wake of the Covid-19 pandemic. The Vinovest 100, a proprietary index that tracks 12 different fine-wine markets worldwide, on the other hand, grew 1%.
A portfolio should have assets with varying correlations to the stock market. It helps mitigate risk. Of course, a well-diversified portfolio is not the same as picking a wide range of stocks, bonds and mutual funds. These assets are vulnerable to the same systematic risk factors. Inflation, interest rates, liquidity and inherent risk can cause someone to lose money when the stock market goes down.
The risks for fine wine are radically different. Fine wine doesn't concern itself with inflation or interest rates. Instead, wine prices are impacted by consumption trends and the ever-decreasing supply of vintage wine. It's why fine wine weathered the last recession when traditional investments could not.
Related: Choosing a Wine to Buy and Hold to Mark a Special Event
3. Fine wine has low volatility
The longer you hold onto a wine, the less volatile it becomes. This is a byproduct of a supply and demand imbalance. Simply put, fine wine has a perfectly inverse supply curve, which becomes more pronounced as people drink a particular wine.
Fine wine has bond-like volatility levels. It's as steady and consistent, even when traditional markets are in flux. Just look at the difference in volatility between the Liv-ex Fine Wine 1000 Index and benchmark equities. One looks like a roller coaster and the other looks like an easy hike.
Low volatility can translate to more peace of mind for investors. People don't have to worry about "timing the market" or their portfolio swinging wildly in value. Because investors can't publicly trade shares of fine wine, they avoid the volatility that comes with public markets.
4. Wine consumption is at record levels
It's no secret that people love wine. In 2020, Americans consumed more than one billion gallons of the stuff. It's the first time the United States has crossed the ten-digit threshold, doubling American wine consumption since 1996.
The demand for reds and whites isn't limited to the United States. Rising global wealth has led to more fine wine investors and consumers in Russia, Asia and other emerging markets. According to Investing in Liquid Assets, there's "an unprecedented demand for…investment-grade wines."
The demand, especially for critically regarded vintages, should only increase in time. Why? Because the supply will drop as people drink the wine. Every time that happens, there's one less bottle in existence, making the remaining ones a little rarer and a little more expensive. It's a textbook supply and demand imbalance.
Take a winery like Screaming Eagle. It only produces 500 to 850 cases per year (6,000 to 10,000 bottles). According to Wine-Searcher.com, the average bottle costs $4,160. As bottles of the cabernet sauvignon disappear into people's stomachs, the price tag rises. It's why the 2015 vintage costs $100 more than the 2016 vintage, even though critics gave both a consensus score of 97.
Related: 10 Interesting Investments to Make in Your 20s
5. You have tangible ownership
Some people prefer investing in tangible assets because they're, well, tangible. You can share a 2015 Châteaux Margaux with friends or revel in the beauty of Monet's Water Lilies. You have direct ownership of the object. Even if the wine investment company were to disappear tomorrow, you would still retain ownership of every bottle in your wine portfolio. When you buy a public investment like a stock or bond, you receive a paper asset. You don't really own it at all.
Plus, if you actually want to enjoy your investments, all you have to do is pour it into some fancy glasses. The same cannot be said of your PepsiCo or Anheuser Busch InBev stock.
Fine wine is a growing alternative-asset class with low correlation to stocks. Not only does it have lower volatility than the stock market, but it has also outperformed it during the past couple of decades. While there is a different set of risks, like lower liquidity and storage or insurance costs, many investors are turning to wine investing for enjoyment, returns and social currency.
