Here’s one for you. If Fine Wine is the investment opportunity it is touted to be, with the mass of graphs and charts that support its record of strong returns over a long enough time period to demonstrate consistency, how come it is not a default asset choice for just about every investor maintaining a portfolio with an eye on growth?
Sure, it’s a popular choice amongst more experienced investors with a sophisticated understanding of the pros and cons of a wider range of asset classes, but why isn’t just about everyone building or managing a portfolio using fine wine as a tool for introducing strong growth at a relatively low level of risk?
To understand the answer, you need to take off your investor hat for a moment, and pop on the headwear of the psychologist.
The two big influences that may be keeping you from Wine
In all areas of life, we are all conditioned by two key influences: the lessons we learned while starting out, and the expert guidance and peer counsel we receive day to day.
In investment terms, this means that the wisdom that was passed down to us from parents, mentors and our own efforts to acquire knowledge, at the time that we began to invest, exerts a huge influence on our core behaviour.
Inherited wisdom, in most cases, advises that ‘good’ returns, with an ‘acceptable’ level of risk, are best achieved using a mix of equities, bonds & gilts, and property.
As to the guidance of professional advisers, financial journalists, and well informed friends?
Well, that tends to follow the same path. The advisers and investment writers stick to the received (and perfectly ‘solid’) wisdom on what makes a ‘sensible’ portfolio, because they want to please clients’ expectations, sell advice (or investments) and minimise the chance of getting it wrong. It’s also the case that, as regulated advisers, they are restricted in the scope of the advice they are authorised to offer. They are not qualified to offer advice on alternative investments like wine, and cannot offer to arrange these for you as investments.
Decide for yourself, then, how likely an adviser is to recommend an investment to you that may well outperform the products he or she can offer, thus sending you somewhere else to make your investment.
In the case of well-informed friends, they tend to be more experienced, sometimes even professionally qualified, yet working off the same, time-served and venerated model of what a portfolio should look like.
In both cases, the well-intentioned guidance that comes back to us tends to be “equities, bonds & gilts and property”.
Fine Wine as an investment
But what if we weren’t conditioned this way? What if you’d grown up with a broader outlook on how best to manage your portfolio?
Or, if you think of yourself as an investor limited somewhat by your own understanding, what if you were a more sophisticated investor with a greater command of the pros and cons of less ‘mainstream’ classes of asset?
Like gold or silver, Fine Wine is a traded investment. Unless you have a particularly insecure nature, and an environment-controlled cellar of your own, you don’t take delivery of your investment. It sits in a condition-monitored bonded warehouse under the protective gaze of your Fine Wine investment manager or Fine Wine merchant.
While it sits there, its value appreciates. This is driven both by its maturing and so increasing desirability, and by the fact that, being select wine produced in limited quantity, the number of cases remaining unconsumed in the world decreases continuously.
Appealing investment though it may be to some, it’s de rigeur with a chateaubriand to others. Every bottle of a Fine Wine in which you hold an investment, that gets consumed, increases the scarcity, and so value, of your investment.
So what makes Wine such a good investment?
The case for Fine Wine as a component of a growth-oriented portfolio is compelling:
At a technical level, Fine Wine is not tied to other asset classes and markets. Its fortunes don’t depend on the stock market, the property market or, fundamentally, on currency fluctuations. So in times of uncertainty, such as those we are experiencing in the UK right now, the ‘independence’ of Fine Wine is a big plus.
Next, HMRC classifies wine as a ‘wasting asset’. This means that, in the majority of cases, appreciations in its value are free of Capital Gains Tax. Who doesn’t like a return free of tax?
Thirdly, Fine Wine is tangible, like art, or vintage cars, or rare manuscripts. So it offers the pleasure of possession. This is not a financial criteria, but it does have a strong emotional appeal for lots of investors.
Finally, and most importantly for most people, Fine Wine can deliver seriously impressive performance.
Between 1988 and 2017, the compounded annual return for the most ‘investable’ wines in the market was 11%. 11% per annum... over a period of 30 years.
What’s more, an ‘index-weighted’ portfolio of fine wines bought at any time between 1990 and 1995 and held without trading for 5 years, would have generated returns of between 100% and 350%.
By the standards of any investor, those are impressive results.
So why doesn’t everyone invest in wine?
Conditioning and conventional wisdom are powerful influences over us all. As investors, we tend to stick with that ‘sensible’ mix of asset classes that balances some measure of opportunity for growth, with sufficient conservatism to protect us from unacceptable risk, and trust that time will work its magic for us.
For some investors, this may be the right thing to do.
But if you have an appetite for something a bit more interesting, a fancy for returns that mainstream asset classes are unlikely to deliver, and an assertive attitude to risk; or if you’ve now simply reached a point where your portfolio is robust enough to permit you to be a little more adventurous with the potential to add a lucrative top up over the next decade, break step with your conditioning and talk to us about Fine Wine.