Investing in Fine Wine

Your significant other orders a certain cabernet for $40 that he feels will be worth $400 in the future, and wants to start collecting other vintages as well. But should you invest in a product that disappears with a broken bottle, or can be emptied into glasses at a party on a whim? How do you really know what a bottle is worth now and what it will be worth in the future? Plus, what expenses and space requirements are involved in storing wine? Read on to learn more about investing in wine.

Investing in Wine for Love or Money

When you decide to invest in wine collecting, the first decision you have to make is if you are investing for the love of certain wines, to make money, or a combination of both.

If you are going to invest purely because you are a connoisseur of fine wines, pick wines you enjoy in the hope they will increase in value. Then, if you happen to drink a few bottles along the way, it’s OK, because the endeavor is a hobby, like collecting baseball cards or stamps. On the other hand, even investors who don’t drink wine at all may be interested in putting together a collection for investment purposes. As an alternative investment to traditional vehicles like stocks and bonds, wine can diversify a portfolio. This is particularly true for wine, because its value is generally not tied to economic factors, interest rates, or other traditional metrics.

Alternative investments have surged in recent years, driven by the uncertainty about how the COVID-19 pandemic will impact the broader economy and traditional asset classes. A recent Goldman Sachs survey of investors showed that 60% of respondents planned to increase their allocation of private assets, which can include alternative investments like wine.

Ways to Invest in Wine

It may surprise you to learn that there are a variety of ways to invest in wine that go beyond buying bottles (although that is a common approach, and a potentially lucrative one). In addition, you can gain exposure to wine by investing in beverage companies that make or sell wine, such as Constellation Brands Inc. (STZ). Though there are currently no exchange-traded funds or mutual funds specifically dedicated to wine, funds targeting so-called “sin stocks,” luxury goods, or even the broader consumer staples sector may all provide exposure to companies involved in the wine industry.

It may also be helpful to get to know the most popular benchmarks for the wine industry, including the London International Vintners Exchange, or Liv-ex, and its family of indices. The benchmark Liv-ex Fine Wine 100 index, which tracks 100 of the most sought-after fine wines globally, has provided a 1-year trailing total return as of May 25, 2022 of 22.2%. This is substantially better than the performance of the broader market during this time; the S&P 500 has generated 1-year trailing total returns of -5% over the same period.

Additionally, services such as Vint or Vinovest provide securitized wine investing options for investors looking to diversify into this area but without the significant capital typically required up-front to launch a bottle investment. These companies simplify the process considerably for the investor and typically provide storage, insurance, and other services as well, but investors can expect to pay a fee to the company as well.

Defeating Breakage and Spoilage With Storage

If you do decide to invest in bottles themselves (rather than through wine stocks or funds as described above), you’ll need to be sure to protect your investment. When you are storing wine you’ll drink within a few weeks, you can keep it in a wine rack for display in your home. However, keeping your wine in optimal salable and flavor condition for long time periods requires more careful storage. According to Wine Spectator writer, Bruce Sanderson, in “The ABCs Of Storage,” wine will produce small, flaky crystals if exposed to excessively cold temperatures, although this is less likely to happen in wines that are cold-stabilized.

On the other end of the spectrum, a room that is too hot could cause a rapid increase in the time wine takes to reach its premium flavor and salability. If your wine matures too fast, you’ll have to sell it faster, reducing the likelihood of making big profits in the future.

To properly store wine, you need a dark area with optimal temperature and humidity levels. This can be accomplished in your basement or a dark closet if you live in a moderate climate. To decide whether your area of the country is suitable to store wine, talk with wine cellar managers in your area. If you don’t have optimal conditions, you will need a wine cooler, which for a large collection could run into thousands of dollars. You’ll also need substantial space.

Be sure to include the electricity costs to run your wine coolers in your budget. The best way to calculate the estimated cost of electricity use is to check energy ratings of the wine coolers you are considering buying, and then relay this information to your electric company to see what it would average per month.

If you don’t have the space to store your wine collection, you will want to contact local wine storage facilities for pricing, storage capabilities, and the amount of insurance included.

Wine Insurance

Expensive wines are considered valuable items, similar to jewelry. You will need to discuss with your home insurance company how to cover your collection to its full value, which will most likely include adding coverage for valuables. You will want to compare prices for wine insurance from other carriers as well. Remember to consider the deductible amount, the coverage amount in relation to the value of your collection and the cost of the insurance policy.

If you live in a climate prone to natural disasters such as earthquakes, floods or tornadoes, make sure your insurance policy covers breakage or contamination due to these weather emergencies.

Collecting According to Your Budget

Once you’ve added up storage and insurance costs, you should budget how much you’d like to spend. Use the following factors to calculate a total budget:

• Costs of insurance and upkeep of storage facility; and
• How much money you are willing to risk on wine after deducting insurance and storage costs, plus other safer investments, from your total investment budget.

The Impact of State Regulations

If you live in a state that doesn’t allow purchasing wine over the internet, directly through a winery or through a retailer who isn’t required to purchase wine through a wholesaler, you are limited in the selections of wines you can purchase for your collection based on what your region’s wholesalers choose to carry. Before you decide to start a collection, find out what restrictions in availability exist in your state.

How to Research Current and Future Wine Values

The best indicators of a wine’s current and future values are ratings and scarcity. Wine critics rate wines on a scale of 1 to 100. Before you purchase wine based on ratings, also read reviews from several critics. Wines that rate around 95 are considered high quality.

Scarcity is harder to predict. A wine that is currently in limited production is a good indicator, but which wines will be scarce later on is more difficult to figure out. Research wineries you are interested in for the past performance of prices. You can keep track of wine prices for almost 5,000 different wines at Vinfolio.com.

Commission

If you graduate to selling a valuable wine in the future, most of this is done through auction houses. The commission charged varies quite a bit between an online auction house, such as winebid.com, Sotheby’s or Christie’s. However, before you decide to go with a cheaper online alternative, make sure the sale prices of the wines you wish to sell are similar. If you have a wine currently going for $10,000 a case at Sotheby’s and $5,000 at an online auction, the difference in commission costs is worthwhile. You can find bid prices for online auction houses on their websites, but brick-and-mortar auction houses will require a phone call to acquire more details.