Portfolio Diversification with Fine Wine

As we look towards increasingly unsettled times, investors look more and more at protecting their assets. The war in Ukraine has seen food and fuel cost spiralling, while inflation has caused the general cost of living to skyrocket. This double whammy has left many families wondering if it’s time to dip into their savings. 

Traditionally, stocks and shares perform well in times of inflation with the market price of stocks directly proportional to the rate. On the other hand, as growth stocks have minimal cash flows (ergo a negative correlation with stock flows), dividends cannot align with the rate of inflation and the stock price drops. Therefore the investor has to decide … to invest or not to invest; that is the question. 

The growing trend around investment in fine wine, an alternative investment that offers diversification and the potential for high returns, continues with abandon. This trend can be primarily attributed to wine investing apps such as Vindome which have made the process easy and transparent. Far be it from us to tell you what to do with your money, but if you have not already diversified your portfolio, you should do it now. 

What is portfolio diversification?

All hail the diversified portfolio. This type of investment portfolio works along the same lines as the “don’t put all your eggs in one basket” adage. The logic being, if you stumble and one basket falls, chances are the contents of that basket will get broken. One basket – all eggs are gone. Lots of baskets, you’ll probably manage to save the contents of the others. Simple, right?  Those words of wisdom go well beyond farming; they also perfectly encapsulate the idea of not risking all your money on a single investment.

So, investors need to reduce their risk of a cracked nest egg by diversifying their portfolio. 

A diversified portfolio thus encourages you to invest in stock or alternative assets from several complementary industries. This portfolio can also go into different countries and include property, watches, jewellery, and the all-important one for wine investors, fine wine. 

The beauty of a diversified portfolio is that various assets work in harmony to reduce your risk of loss in volatile times. In a report written in May 2020 at the start of the Covid-19 pandemic, the American Association of Wine Economists reported that the IMF predicted a 3% drop in GDP, which, experts thought at the time, could lead to a massive 35% drop in fine wine prices on the secondary market. 

This, we now know, hasn’t been the case. Despite a small dip in Q2 2020, fine-wine prices on the secondary market continued their steady trajectory throughout the year, completely recovering by the end of the year. The stock market is still recovering. 

What are the different ways to diversify your portfolio?

Diversifying your portfolio should be seen as an art form. These types of investments are not get-rich-quick schemes, so it takes time and practice to get them right. In general, a good offence is your best defence, so think about planning your (well) diversified portfolio with an investment horizon of five years for the best results. 

There are three traditional ways to diversify your portfolio. 

Asset Diversification

This type of strategy remains within your asset class. You invest in different assets within the same asset class, ergo buying both high and low-risk stocks across the market. These high and low-risk assets should be represented equally across the portfolio and can be represented through industries that complement each other. 

International Market Diversification

When in doubt, go abroad. Looking at the market in other countries helps to diminish your risk factor and balance your portfolio. The stumbling block however is that different countries have different investment processes and sometimes require residency. 

Alternative Investments

Diversifying your portfolio across various asset classes has become increasingly popular in the wake of Covid-19. These assets operate primarily in the private market and are largely unregulated. Alternative investments are relatively liquid – and we don’t mean just the wine! These can be anything from hedge funds and private equity to the more exciting option of rare wines, cars, and even baseball cards and trainers. 

Wine investment for portfolio diversification

We have long been extolling the benefits of investing in fine wine, but in if you don’t believe us, read on. According to the famous Knight Frank Wealth Report 2021, fine wine delivered a huge 16% return in 2021, one of the highest returns of the year. This data cements fine wine as a top-performing luxury investment, equalled only by collectable watches (which saw the same 16% ROI over the same 12-month period). 

The impressively high returns are just the beginning. Liv-Ex showed an astonishing 40.5% return rate in 2011 – note this was post-2008 crash when the rest of the financial world was struggling with economic turmoil. They also detailed an annual compound return of 14.1% in the first ten years of 2000. Not bad.

How to invest in wine?

However, all that is bottled is not gold. But if you follow these few basic tips, then you should be on your way to beginning your wine investment journey! 

Do your homework on what defines a fine wine. Fine wine and notably investable fine wine is defined by three points. Colour, provenance, and limited production. Do not get fooled into thinking that just because it’s expensive, it’s investable! 

Check for Authenticity. Like all luxury goods, fine wine encounters counterfeiting. Choose a wine that has guaranteed provenances such as one that is recorded on blockchain or even NFT. 

Understand the Ratings. Wines have been tasted by experts for a reason. Read the reviews and take note of their comments, particularly the drinking window and ageing potential.

Look at Various Investment Horizons. You can diversify your investment horizons by adding different vintages to your portfolio. Mature wines can perform in the short to medium term if sourced at a competitive price. Recent vintages that are not yet in their drinking window will generate ROI in the medium to long term. Investing in en-primeur will secure long-term returns.

Invest in Correct Storage and Insurance. In order for fine wine to age correctly and improve in quality, it must be kept in constant stable environmental conditions. All wines on our platform are stored in our professional warehouses, strategically located close to the production regions.

Are you ready to diversify your portfolio? Learn how to invest in wine in our detailed blog!

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