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Investing in wine: The pros and cons
Karl
5th Sep 2023
Wine investing is becoming increasingly popular among investors wishing to explore non-traditional assets. But is wine a good investment? And if so, how can you invest in wine besides buying a bottle of expensive Bordeaux?
In this article we’re going to take a look at the pros and cons of investing in wine, and explore some ways to add wine in your portfolio. Keep on reading for all the details, or click on a link below to jump straight to a specific section…
Investing in wine: An overview
Whether you’re a sophisticated wine connoisseur, or you’d struggle to tell the difference between a 1976 Chateauneuf du Papex and a bottle of vino Rosé, everybody knows that wine is one of the few things in life that can improve with age!
For investors, buying wine with the intention of selling it at a later date for profit is a tried and tested way to invest (though there are no guarantees of course)….
So, if you’re intrigued by the idea of investing in wine then you might be encouraged to hear that the vintage wine market has performed rather well over the past few years.
The Liv-ex Fine Wine 1000 index – which provides a rough measure of the global fine wine market – rose 38% between the beginning of 2020 and the end of 2022. While the index has struggled a tad in 2023, this big rise certainly shows the potential for wine values to soar, particularly during times of economic instability.
And if you were wondering… the index reports the ‘Burgundy 150’ and ‘Champagne 50’ sub-indices have enjoyed the highest annual returns over the past half-decade, with both more or less doubling in value since 2018.
To further support the case for wine, the Knight Frank Luxury Investment Index – which tracks a basket of 10 collectible items – suggests wine values rose by 5% in the 12 months to the end of June 2023. The index also reports values have risen a massive 149% when looking at the past 10 years.
New World vs Old World
If you’re interested in buying wine, then do note that wine is often categorised into two groups: ‘New World, and ‘Old World.’
‘New World’ wines refers to wines developed in the, errr…. New World, so think of the USA, particularly California, plus the big wine producing nations down under – Australia and New Zealand.
‘Old World’ wines, on the other hand, refers to wines developed in older areas of the world, such as the UK and Europe.
When it comes to investing in wine, old vs new doesn’t really make a difference in terms of values. However, the process used to develop old and new world wines is slightly different which, apparently, makes a difference to the taste.
That’s because Old World countries generally have colder climates than in the New World. As a result, grapes in these regions often do not ripen as quickly. This results in less sugary wines with lower alcohol content which, at the very least, is an interesting fact for your next pub quiz!
The benefits of investing in wine
Now we’ve given an overview of wine as an investment class, here are some reasons why you may wish to consider adding wine to your portfolio…
It’s a tangible asset
It’s easy to see how wine has tangible value. Enjoyed by millions around the globe, wine has a unique ‘selling point’ whereby it’s taste can improve by age. As a result, an older wine might be worth more than a new wine, simply because it has had time to mature. This makes it an attractive asset to own for investors with patience, as long as they can resist the temptation to drink it!
And this is why, because wine is tangible, wine investors will always be able to enjoy the fruits of their wine collection, even if their investment disappoints. The same can’t be said for intangible investments.
Wine doesn’t typically mirror with the market
Own stocks and shares, and it’s probable that your portfolio will suffer big time during an economic downturn. However, wine doesn’t really behave this way. In fact, wine values may increase when the stock market takes a turn for the worse, or when inflation is high, as during such times investors are often tempted to move their money out of volatile equities, and into alternative assets. (This is also generally true for precious metals such as gold.)
So, because of wine’s rather indifferent relationship to the stock market, many investors consider wine as a decent hedge against inflation, or economic volatility.
There are potential tax advantages
Interestingly, HM Revenue & Customs considers most wines to be a ‘wasting asset’. While this may sound like gobbledygook, it just means that HMRC considers most wines to have a predicted economic life of less than 50 years. This is important as it means investors who buy wine and make a profit don’t always have to pay Capital Gains Tax (CGT).
In contrast, when investing in equities or many other asset classes (outside of an ISA) then CGT is often payable.
Yet before you buy wine to protect your wealth from the taxman, there are some important exclusions to be aware of. For instance, some wines are excluded from this rule such as ‘fortified wines’ like spirts or port and madeira. Do take a look at the Gov.UK website if you’re keen to learn more about this rule.
And sticking with the subject of tax, it’s also worth bearing in mind that it’s also possible to invest in wine without having to pay duty or VAT. That’s as as long you hold it ‘in bond’ in an approved warehouse. However, these taxes will be payable if you ever open your wine, or have it delivered to your door. The London Wine Cellar website explains all of this in more detail.
The cons of investing in wine
Now we’ve touched on the benefits of investing in wine, here’s the other side of the coin…
Storage costs
Buy shares, bonds, or even cryptocurrency and you needn’t worry about the cost of storing your asset, besides any fees to your investment platform for hosting your assets.
In contrast, buy physical bottles of wine and you’ll have to think about the cost of storage. Of course, if you’ve an underground wine cellar then – great! If not though you’ll need to ensure your wines are kept out of direct sunlight while ensuring they don’t get too hot or cold.
However, if you feel your home is unsuitable for storing wine then you may wish to turn to professional storage, preferably with a provider that can store your wine in a temperature-controlled room. Cult Wine Investments and Davy Wine are two UK-based companies offering wine storage for investors. Both also allow investors to hold their wine investments ‘in bond’.
Insurance costs
Similar to storage costs, if you invest in wine then you’ll need to consider insurance to ensure you won’t be out of pocket if your collection breaks, or gets stolen.
While some home insurance policies may cover a small wine collection, not all will. Plus, if you’ve a big collection – more than a few bottles – then you’ll almost certainly need to pay for specific insurance, or at least opt for warehouse storage where insurance is included.
While insurance might not cost you an arm and a leg, remember that if you want to see your wine collection rise in value you’ll probably have to store it for a reasonably long time. This means these insurance costs are likely to add up!
It’s a relatively risky investment
It’s fair to say that investing in wine is on the riskier end of the scale, especially if you aren’t an expert. Of course, when it comes to investing there’s nothing inherently wrong with high-risk investments, it’s just really important that you consider your own personal tolerance for risk before you invest, especially if you’re looking to dabble in alternative assets.
Remember, investing in wine requires patience.as your typical bottle will need to be stored a number of years, or decades, before reaching its ‘optimal drinking age’. And, as mentioned above, if your wine investment ends up in disappointment, then you should always be prepared to drink it (and not simply to drown your sorrows)!
How to invest in wine
If you want to invest in wine then you’ve a few options. You can either buy physical bottles of wine and store it yourself, invest in a wine fund, or buy shares in companies involved in wine making.
Let’s take a closer look at these options…
1. Buy bottles of wine.
If you’re interested in buying fine wine with the intention of selling it at a later date, then going via the secondary market is the simplest way to go about it. To do this, you’ll want to research a suitable wine merchant, auction house, or specialist online broker.
2. Invest in a wine fund.
Rather than buying individual bottles of wine, a wine investment fund allows investors to pool their money in order to invest in wineries, vineyards and/or wine makers. This is another way to invest in wine, and can be a good option for those who aren’t particularly interested in the benefits of owning a physical asset.
3. Invest directly in wine companies.
Buying shares in companies involved in the wine industry is another way to gain exposure to fine wines in your portfolio. Constellation Brands Inc, Diageo PLC, and Brown Forman Corporation are just three big-names involved in the wine industry. Of course, there are many, many more to choose from. See our article that explains how to buy shares.
Wine investing: Remember to diversify
Whichever way you choose to invest in wine, it’s important you do so as part of a diversified portfolio.
Consider investing in wine alongside investment classes such as stocks, shares, bonds, or other assets. That way you’ll be less likely to see your portfolio plummet if the vintage wine market takes a hammering over the next few years. We make no apologies for using the overused cliche: ‘don’t put all your eggs in one basket’.
Besides focusing on your asset allocation, if you choose to invest in wine then it’s also worth mixing up your collection with different types and ages. That way you’ll be less likely to suffer should one particular type of wine fall in value. Likewise having different ages of wines will give you some added flexibility when it comes to selling your bottles.
Are you interested in learning more about alternative assets? See our guide to investing in non-traditional assets.
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