Toasting investment success

Many of the world’s best-known investors have a similar rule when it comes to deciding where to put their money.

“Invest in what you know,” said Warren Buffett, the so-called sage of Omaha. “Never invest in an idea you can’t illustrate with a crayon,” added Peter Lynch, who built the Magellan fund into a $14bn giant. It is wise advice that helps explain the growing enthusiasm amongst many investors for fine wine.

Wine, after all, is a physical asset. You may not be a connoisseur – you may not even drink it – but wine is tangible and real. It could not be more different to the complex financial instruments that so many people are urging us all to buy. It is not difficult to understand.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Moreover, the investment returns that fine wine has delivered hold up remarkably well against other assets like stocks or gold.

The Liv-ex 1000 Index rose by 19% last year

That compares to an 18% return from the FTSE 100 Index of shares in the UK’s largest businesses – and a 4% loss in the US government bond market.

Nor was that performance a flash in the pan. Between its launch in 2004 and the end of Jan 2022, the Liv-ex 1000 index delivered a total return of 339.3%.

Indeed, the fact that wine has a track record of holding its value and more – in the face of inflation looks particularly alluring in today’s marketplace. The Bank of England now expects inflation to rise above 7% later this year.

Fine wine displayed a lower volatility over the last five years compared to major equity markets as well as US government bond and gold investments.

(

For investors who don’t like sudden ups and downs, that’s quite something.

A passion investment

Still, while the investment case for wine is a strong one, Patrick Thornton Smith, Customer Experience Officer at Cult Wine Investment, argues that it would be a shame to think only in financial terms. “Fine wine is a unique asset class and has intrinsic attributes that appeal to the heart as well as the head,” he says. “Our customers are increasingly looking to us to expand their wine experiences to complement their investment journey.” It's a good point. Wine might be described as a “passion investment”. It is an asset class that you might consider for long-term investment performance and diversification – not putting all your eggs in one basket – even if you have no interest in the product. But it’s also a product that fascinates many people; the added attraction for many investors is the opportunity to find out more about wine – and to share experiences with other wine lovers.

For companies such as Cult Wine Investment, this is an key part of the story. It offers an accessible route into wine investment, with professional managers who will build portfolios of fine wines on behalf of investors according to their appetite for risk and financial goals; the minimum investment starts at £10,000, and the company takes responsibility for storing and insuring the bottles. But in addition, it offers a programme of experiences: investors get the opportunity to go to tastings, to travel to wine regions and to learn more about their passion.

For many investors, those experiences are just as enriching as the financial returns generated by their portfolios. Their investment is an opportunity to indulge their passion as well as to generate attractive long-term returns.

A toast to diversification

This isn't to suggest that investors should switch all of their money into wine. But it is an asset class that offers something different – an opportunity to diversify away from traditional investments such as shares and bonds, which often move in tandem – both up and down. Wine, by contrast, is what investment experts call an “uncorrelated” investment – its value tends to move more independently of what is going on in other asset classes.

Moreover, none of those traditional assets come with the chance to attend tasting sessions, join educational classes, meet up-and-coming producers or travel to new places. They lack the passion that an investment in wine can offer.

Wine also offers something else that no other asset class can match: you have the right to drink the wine you buy. As your portfolio of wine rises in value over time, one way to cash in some of your profits is to take cases of your wine out of the company’s storage to drink at home. That could be the perfect way to toast the success of your investment strategy.

1 Liv-ex +22.5% 01/31/21 - 01/31/22 www.liv-ex.com; Gold -2.69 01/31/21 - 01/31/22 www.investing.com; S&P500 21.57% 01/31/21 - 01/31/22 www.investing.com

2 Liv-ex 1000 +19.08% 31/12/2020 – 31/12/2021 www.liv-ex.com

3 FTSE 100 +18.44% 31/12/2020 - 31/12/2021; iShares 7-10y US Treasury Bond Index –4.13% 31/12/2020 - 31/12/2021

4 Liv-ex 1000 +339.3% 31/12/2003-31/01/2022 www.livex.com

5 Rolling 5-year standard deviation of monthly returns as of 31 Jan 2022 – Liv-ex 1000 1.10%, S&P 500 4.52%, FTSE 100 3.92%, iShares 7-10y US Treasury Bond Index 1.46%, Gold USD/oz 3.61%.

Past performance is not indicative of future results.