Alternative Investment Opportunity—Wine Investing
What about Wine Investing as an alternative Investment? The stock market is hot right now—as is everything else. Looking for a place to put your money? Let’s talk about wine as a non-liquid alternative investment opportunity.
Yes, there will be plenty of liquidity jokes in this Blog, but wine investing is not joke as an alternative investment class. How can you invest in wine, and should you consider it a stock-alternative or a bond-alternative?
Is Wine an Investment?
Generally, wine and wives get better with age. In addition, both become scarcer over time. Wine because people consume it, and wives because they like to spend more time with their horses than husbands.
But think about this: if something gets better yet scarcer over time, that seems like a good set up for price appreciation. With investment grade wine, the goal is to buy low and sell high.
Investment grade wine can be purchased and stored with the intent of selling it later for others consumption. There is a thriving marketplace for investment grade wine, and there are several options for wine investing.
Options for Investing in Wine
Consider the following options for wine investing:
- Individual equities in large wine producers
- Buy and store your own bottles
- Use a wine investment company to buy and store your bottles for you
We will discuss each in turn. But before we do, it is important to consider why one might invest in wine.
Why Invest In Wines?
Obviously, the play with wine investing is an alternative investment. We seek diversification and non-correlation with the stock market. Wine has a 12-20% annualized return over the decades and is not correlated with the stock market.
If the market crashes, there may be fever rich people to buy your wine. Nevertheless, prices over the long term increase as wine is consumed. And honestly, the rich know better than to be hurt too badly by market crashes… and have plenty to spend on good wine even during economic downturns.
I discussed farmland as an alternative investment. Before we dive into wine specifically, what other alternative investments might one consider?
Classification of Alternative Investments
Above, you can see collectables as a sub-class of alternative investments. Wine, violins and coins are given examples, but one might consider a number of other items: baseball cards, stamps, Star Trek Uniforms, NFTs, oh man the list goes on and on. What do you have expertise in, or where can you leverage other’s expertise?
Other alternative investments listed above include real estate, hedge funds, commodities, natural resources, venture/angel investing, private equity….
So, what is the purpose of alternative investing? We have discussed non-correlation with the bulk of your assets (be that in stocks, human capital, real estate, etc). But ponder this for a second: is the alternative investment a stock-replacement or a bond-replacement? That is: does the alternative investment replace your risk-money or your safe-money?
Let’s ask that question about wine investing.
Is Wine Investing a Stock- or Bond-Alternative?
I have a nice bit on Bond-alternatives you should read.
In summary, though, stocks have high expected return due to high expected volatility.
Bonds have low expected returns due to low expected volatility.
I believe wine is a bond-replacement. You might get better returns than bonds with a risk that is non-correlated with stock or bond market risk. What! Didn’t you say wine returns 12-20% a year?!? Yes, that is pre-tax and before fees.
If you hold your own bottles, expenses may easily be 3% a year. And don’t forget, as a collectable, you are responsible for the 28% capital gain rate on collectables. With both of those together, you might get bond-like returns with this investment.
As risks are uncorrelated with stock and bond market risk, I suggest that when you invest in wine, you use your bond allocation to do so. In fact, 1-5% of your bond portfolio might be in aged crushed grapes. How sweet is that?
Since I let the tax horse out of the barn, let’s talk next about the capital gain rate on collectables.
Collectable Capital Gain Rate is 28%
That’s right. It is 28% plus NIIT, so you are going to lose over 30% of your profit from wine investing to taxes.
Collectables can benefit from deductions and depreciation, so do pay attention to your basis. It looks like you can offset your collectable capital gains through tax loss harvesting or carried forward capital losses, but I would love to see a good blog on the collectible capital gain rate. Any takers?
Summary: Investing in Wine
So now you know that wine is a strong consideration for a bond-like alternative investment. Returns can be sweet, but taxes are not great.
Also, remember that wine is not a fungible investment. I should say that since there is no cash flow, it is also a speculation rather than an investment, but that is being nit-picky.
Moreover, it is a non-liquid investment. This is a good thing many times, as I pointed out in my bit The Iron Triangle of Investing: Choose Two.
I recently invested 0.25% of our net worth in wine. My wife wants me to point out it was “her” money, as the source was a recent after-tax bonus that was destined for “safe” money. Funny how it is her money until taxes are due and then I wind up writing that check… To me, it doesn’t matter. It is our money and our net worth and our life to live together. Even though she likes horses better than she likes me, she does in fact get better with age. Now if only I could bottle her and store her in a cool climate-controlled cellar…
Since our goal asset allocation is 80/20 at this phase in life, that means we have 1/80 of our ‘safe money’ in grapes. I’m comfortable with that, and plan to quadruple the investment in a few months if I like the process. We are young and our safe money can be illiquid at this point. This is a bit like a longer duration bond held to maturity, or a 5-7 year CD. We don’t need the money now, but want a return at some point.
How Do I start Investing in Wine
Ok, now that you are sold on wine as an asset class, how can you invest?
Consider names such as Constellation Brands, Truett-Hurst or Diageo. Also, Williamette Valley Vineyards is a US company for consideration.
As you know, I don’t like individual equities because I don’t like deciding when to sell. When I buy equities, I buy all of them. I plan on selling them when I need money and not when they are up but before they, inevitably as all stocks do, become irrelevant and worthless.
Buy Bottles Yourself
Another option is to buy wine bottles and store them. Doing so you will get tax benefits such as depreciation and deductions for carrying costs. See your CPA for discussion.
This is not for me because literally I cannot keep the goats from getting into my home. And I’m talking about actual goats not the kids. I doubt I can get insurance with my current living arrangement.
Use a Wine Investment Company
I chose Vinovest. (Note, this is not an affiliate link but I may have reduced account fees if you use this link to invest.)
Check out the website. Pretty slick! Vinovest is an on-line platform and a one-stop-shop for wine investing. They research, authenticate, buy and store wine for you. What they buy depends on your risk profile and expected holding duration.
After purchase, your wine is stored in professional storage facilities, and they insure your wine as well.
Vinovest also provides a secondary market place so your investment is actually liquid. As I recommend you use wine investing as a bond-alternative of modest duration, the liquidity is a bonus.
Vinovest has been around for about 2 years. To me, it does not seem to have the same risks of crowdsourcing real estate sites that have yet to survive a real estate correction. Perhaps the worst that could happen is that you pay to have your wine shipped to you if the company tanks unexpectedly. Yes, as with all speculations, you could lose money. And you are betting on a new platform in a very old business full of snobby rich people. But at least you own a real, tangible and tasty asset.
The other downside is the annual fee of 2.85%. This is quite a bit, but less expensive than the storage, real estate and utilities fees would otherwise be if you purchase and maintain your own bottles. Also consider, the fee is not taken out of your basis, so you pay taxes on the growth of your asset and lose the entire fee. This is another reason why I consider the returns bond-like.
The fees cover buying, fraud detection, storage, insurance and selling. A one stop shop.
You will not get yearly tax documents and only get a 1099 if you sell more than 20k a year. Otherwise, basis and income is self-reported to the IRS. Unlike bonds or CDs, there is no yearly tax drag, only fee drag. And the collectible capital gain rate of 28% once you actually realize the gain by selling the asset.
What is the Best Wine to Invest In?
If you are not a wine expert, then it is difficult to know what is an investment-Grade Wine. Investment Grade Wine covers less than 5% of bottles, and is fine wine that has a chance to increase in value after a few years. Considerations include:
- Critics ratings
- Price appreciation
So, Who is your Expert?
Different Vintages, Different Regions, Different Wineries can have good and bad years.
If you decide to invest in an alternative investment such as wine investing, who do you trust to help you along the way? I like Vinovest.
Like an index fund, consider gathering a portfolio of wines through use of an investment wine company. No other investment has such a liquid downside. Drink your cares away instead of losing your investment.
On the upside consider a non-correlated asset with strong historical returns and low volatility. There is no tax drag and you only pay collectible capital gains once you sell. If you have high-yield bonds, or Muni’s in your brokerage account, consider an allocation to wine investing instead.