Why alternative investments are no investments at all
Wine, art and antiques may sound like good investment ideas, says Merryn Somerset Webb, but they're not. They may very well be entertaining hobbies, but you shouldn't be betting your financial future on whether people's tastes will still favour Château de Chassily in a few years' time.
This week's Money section of the Sunday Telegraph included an interview with Shilpa Shetty ("Shipshape Shilpa") in which she explained her approach to managing her money. Or as it turns out, not managing her money. She thinks she "would be useless" at managing her own money, so all her affairs are taken care of by her father.
He pays her staff; he pays her credit card bills; he manages her investments; and she shares a home in Bombay (bought ten years ago and, she says, her best investment yet) with him and her mother. She has, she says, "unconditional faith in the decisions he takes." Why? "Because he knows exactly where to invest." She might be right although that would make her father the only person in the entire world with such a valuable skill.
But trusting someone else 100% with your money takes you into dangerous ground. Just ask David Cassidy. Interviewed in another paper over the weekend he admitted to having been twice brought to the edge of financial ruin by useless or corrupt managers. He's clawed his way back and seems to have learnt his lesson.
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Not long now, and some of the contestants on a new show hosted by Duncan Bannatyne are likely to do the same. In Beat the Bank, every week a couple is to part with £10,000 of their own money (in the first one it was, we were told, the sum total of their savings and their house deposit). The couple gives the money to an expert, chosen from three, and the expert is then sent off to see if he can 'beat the bank' (i.e. make a better return than a savings account) over three months. The fact that this is risky is mentioned several times in an attempt by the producers, I suppose, to introduce a hint of responsibility into the programme.
But nonetheless, the first week's couple, Ian and Caroline, went along with the format (it wouldn't have been much of a show if they had not) and cheerfully handed over their entire net worth to a contemporary-art dealer, who said that she would be "very, very upset" if she didn't make them "at least 25%" in three months. And would be "absolutely astonished if by extrapolation of past exhibitions" her plan to buy art for them and then sell it 12 weeks on didn't work out. The couple chose her over the smooth sales pitch of a wine dealer who told them that it is "very hard to lose money on wine", and over an antiques dealer who stated very clearly that the couple were not going to "lose their money", for the very simple reason that he was going to find them pieces that "we absolutely know will turn a profit".
So what happened? Precisely what the programme makers had hoped would happen. The art was bought, the wine was bought and the antiques were bought. Then all were sold and all three experts were able to say that they had made 30% plus over the three months.
It's easy to lose money on wine, art, and antiques
The problem with this is that it tells us nothing about the wisdom of investing in this kind of stuff. Bannatyne's programme must have been made a good few months ago. Try the same thing now and his couples are more likely to lose 30% than make a penny. Hard to lose money on wine? Not so. An article in the Telegraph last week suggested that some of the "top" wines have lost 40% of their value since the credit crunch kicked in, and the pretty comprehensive Liv-Ex 100 wine index was down over 12% year on year in November.
And art? The same. It's always been a piece of cake to lose money in the art market and this autumn it has been particularly easy to do so. Sure, Damien Hirst's big auction went with a swing last month, but most contemporary art auctions (and other art auctions) since have been dismally disappointing. So much so, that the big auction houses have been tripping over themselves to lower reserves and to stop offering price guarantees. Phillips held an auction in New York in October for art they expected to fetch a total of over $18m. The final total? Around $5m.
Auction prices for antique furniture are also falling. If Ian and Caroline were to hand over their £10,000 to the same experts today, it would take a miracle to turn it into £10,001, let alone £13,000.
Why house deposits belong in the bank
The point is that all investment comes with massive risk, and non-financial investment comes with even more than most. The value of a bottle of wine, a chest of drawers or a piece of art is dependent on nothing but supply and demand. So it is as dependent on economic factors as any other investment. Worse, these investments are also dependent on taste in a way that financial investments (bonds, equities and so on) are not. That makes them even more risky than financial investments and therefore something that for most of us should fall under the heading of 'hobby' rather than 'investment'.
Wine writers tend to end their articles about 'investing' in wine with a sentence about how if your selections don't work out as money-makers, you can always drink them. Duncan Bannatyne said something similar in an interview about Beat the Bank. "If you end up stuck with a load of red wine you, can drink it. Or, if you can't sell the art, you can put it on your walls." That might be fine if you are already richer than anyone needs to be (Bannatyne is estimated to be worth around £310m). But not if you aren't.
After all, who wants to have no choice but to drink their house deposit, or to sit on the sofa of their rented flat staring at it in the form of an incomprehensible piece of worthless contemporary art? House deposits belong in bank accounts.
This article is taken from Merryn Somerset Webb's weekly Money Sense email.Sign up to Money Sense here.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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