Alexander Westgarth is the founder and CEO of WineCap, an investment platform that makes wine investment affordable, transparent and simple.
Fine wine has always been a treasure for me. Each sip holds a thousand stories. Whispers of the warm French sun. The silky burst of grapes. And the reassuring flavors that remain constant throughout the passages of time. It’s little wonder I dedicated my life to this most precious of assets. Two decades ago, I left my career as a basketball player, and I’ve been in the business ever since. My investment platform is a hub for investors to trade the most prestigious bottles.
Of course, I often get asked what investors should consider as they begin their journey. The fine wine market is booming, and new joiners want to make sure they avoid pitfalls. Let’s cover some of the basics of good wine investing.
Wine is generally a hedging instrument.
As you build out a portfolio, consider wine as a hedging asset. Wine can rise in value even during recessions or times of financial uncertainty. The past years are a good example. While the world grappled with pandemics, wars and inflation, fine wine enjoyed an incline. Over the last half-decade, the average bottle of fine wine has increased in value by a notable 45% according to the Liv-ex 1000 index.
Certain wines did exceptionally well over the pandemic. The standout players were Burgundy, Champagne and Bordeaux. At the start, fine bottles of Burgundy were selling for just under £200 (May 2020). But within two and a half years, average prices soared to over £325 (September 2022)—a return of 62%.
There are several reasons why wine tends to buffer against market shocks. Firstly, as a physical asset, it’s less sensitive to inflation—just like property, gold or excellent art. Secondly, the market is private. Buyers are often high net worth or ultra-high net worth individuals, so they are wealthy and passionate. Thirdly, it’s a rare and depleting asset.
The scarcity factor of fine wine makes it increasingly valuable over time. As purveyors open bottles, the demand outweighs supply and prices can soar. I’ve found this is especially true for regional wines like Burgundy, Champagne and Bordeaux as there is a limit to how many can be produced each year. For instance, according to my company’s data as of May 30, Domaine Leroy’s Nuits-Saint-Georges’ Aux Lavieres has risen in value 353% over the past five years, driven by scarcity.
Wine can smooth out volatility.
An excellent wine must be enjoyed slowly. In the same way, the wine market tends to move at a more gentle pace too. While stocks can sky-rocket or plummet in weeks, wine movements often take months. This can add much-needed stability to investment portfolios.
Some of the wealth managers I encounter use this stabilizing influence to even out some of the erratic performance of other assets.
Generally, it’s not advised to allocate more than 25% of the portfolio to wine. I personally would go further and say that responsible wealth managers should not go higher than 10%. But even a small allocation can make a difference to the volatility of the overall portfolio and help to calm investors’ nerves during downturns. When inflation rockets, it can also help to preserve some of the wealth eroded through bonds and cash-like instruments.
Be aware of the illiquidity risk.
The substance of fine wine may be liquid, but the investment is generally not. Before embarking on a wine investment journey, I would encourage investors to think deeply about their liquidity needs. Those who might need quick access to cash may want to include some cash-like investments like T-Bills or Bank CDs in their portfolio.
In my experience, with digital platforms, you can usually sell your bottle for a good price within a couple of months. But if you’d prefer to go down the physical auction route, the process can take longer.
For the best results, I’d probably encourage a buy-and-hold strategy. I’ve found that, ideally, investors should avoid selling for at least five years (depending on the maturity of the vintage).
Consider the costs involved.
Unlike investing in the public markets, fine wine comes with a few upkeep costs. Investors should ensure bottles are stored securely and at the right temperature. They may also wish to get insurance as well, especially if the wine will be transported from one location to another.
However, the plus side is that these prices are usually fairly affordable. I’ve found storage rarely costs more than a few dollars a year per case. Although, of course, some cellars will be more expensive than others.
I would encourage investors to shop around, seek reviews and—if it’s not already included—see if you can negotiate insurance within the annual fee.
If you live in the U.K., fine wine is often exempt from capital gains tax. This will usually off-set any storage costs, several times over.
Invest soberly.
Done right, there is a lot of money to be made in fine wine. The market is growing at an exciting pace, with new buyers joining every day. From my own platform, I’ve witnessed mind-blowing returns over the past years.
But there are also pitfalls that I would urge investors to steer clear of. Ensure that there is sufficient liquidity elsewhere in the portfolio for emergencies, and be aware that there are some long-term costs associated with the investments.
I’d encourage investors to position fine wine as a hedging asset and volatility smoother. No matter how exceptional the bottle is, wine should not be the star of the portfolio. It’s a stable and useful teammate, working as part of a wider group of assets to help the investor meet their long-term goals.
For me, the secret to good wine investing is simple: Research your bottles, buy early and hold until demand becomes insatiable.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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