Why Your Investment Portfolio Is Incomplete Without Fine Wine

Even inexperienced investors know not to put all their eggs in one basket. There’s just one problem. What are the right baskets for those eggs? There are more investment options than ever, leaving investors with a paralyzing number of potential choices. A common mistake is to invest only in stocks. Even if you spread your funds across hundreds of stocks, you can’t diversify away systemic risks. The entire stock market may move in a sharp downturn direction, resulting in a big shock to your bottom line.

To avoid significant drawdowns, investors need to find other baskets with a low correlation to the stock market. One solution: alternative assets. Traditionally, investors have used bonds, real estate, and gold to increase portfolio diversity.

Let’s start with bonds. Bonds often have a negative correlation with the stock market. However, over the last 40 years, bonds’ valuations have increased, and financial experts fear that bonds can no longer support stocks during selloffs.

Gold, crypto, and real estate come with their own set of pros and cons Year of year, the price of gold and crypto more closely resembles a roller coaster than a smooth upward line. Gold has also fared poorly during periods of high inflation. Meanwhile, the real estate thrive in bull markets but values can collapse quickly as seen during the Great Recession in 2009. 

So, what basket is worthy of investors’ eggs? Fine wine. For centuries, alternative investment has served as a store of value, providing smart investors with a stable and high-appreciate asset for their portfolio. Warren Buffett has even endorsed fine wine as an investment option.

Why Diversify Your Portfolio with Fine Wine?

Two factors that impact an asset’s diversification potential.  First, investors’ baskets are different and react differently to market conditions. For example, many investors use equities and bonds to build their savings and retirement accounts. Many of those investors include pension funds, other institutional investors, and retail investors. These individuals monitor the daily market news and react swiftly to changes in market sentiment. They may also use risk management tools to push the prices of equities and bonds in a certain direction. As a result, the markets can see sizable swings in a short span. 

Fine wine offers a hedge against these sudden shifts. Most wine investors view the asset as a long-term investment and have liquidity elsewhere to combat severe financial crises. For instance, during the Covid-19 Recession of 2020, the Dow Jones fell 22.7% and the S&P 500 fell 22% in the first quarter. Meanwhile, the Vinovest 100, a wine investment platform, returned 1.1%.

Second, the drivers behind these assets should be different. For example, the main drivers of equities and bonds are economic growth, productivity, business conditions, and low inflation. Most of these factors do not have a meaningful effect on fine wine. That’s because wine prices are driven by scarcity, high inflation, increased wine consumption, and more affluent buyers in the market

Fine Wine vs. Other Assets

So, how does fine wine stack up against other assets like equities, bonds, gold, and Bitcoin? Let’s find out. To start, here’s a list of three portfolios - a pure stock portfolio of S&P 500, a fixed income portfolio represented by Vanguard Total Bond Market Index Fund, and Vanguard’s classical 60/40 mix rebalanced monthly. The data is from April 2014 to Sept. 2021.

Based on this data, bonds decrease the volatility of a pure equity portfolio. Now, what if we add gold as a diversifier to the traditional 60/40 mix?

Great! Even though the gold was volatile and appreciated barely above inflation, its low correlation with the traditional markets boosted the Sharpe ratio of the 60/40 Mix by two basis points.

Here comes the interesting part: adding non-traditional assets, such as Bitcoin. The cryptocurrency has been extremely volatile since its inception. Any prudent investor considering Bitcoin in the early 2010s should have added no more than 2% to their portfolio.

There you go. The 2% addition of Bitcoin substantially improved the Sharpe ratio, with the figure jumping 19 basis points.

But what about wine? Unlike Bitcoin, wine is a real asset and has an extensive history of robust performance. Dedicating 5% to 10% of a portfolio to wine would be as great as adding a glass of vino to your dinner. 

Wine has an exceptional risk/return profile and can improve almost any portfolio, even one optimized with four different asset classes. In this example, wine improved the Sharpe ratio by another eight basis points to reach 1.43.

Now, you might ask, “What happens if we remove a slice of the wine return?” That’s assuming that the wine management requires specialized storage conditions and handling, for which you would have to compensate the manager. As a rule of thumb, investors can assume 2% annualized costs for this hands-on management. In this situation, wine still added to the Sharpe ratio of the portfolio even when the equities showed impressive returns. 

Simply put, wine offers immediate value to investors, even those with well-diversified portfolios. So if you have some eggs that are looking for a home, consider a wine basket as a safe place to put them.

The Bottom Line

• Investors should diversify their holding in different baskets
• These baskets should be less correlated due to different drivers of risk and investor pools
• Traditional assets pair well with alternative assets
• Wine increases the risk-adjusted return of an already well-diversified portfolio, even after management fees.