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What the Covid-19 Pandemic Can Teach Us About Wine Investing

What the Covid-19 Pandemic Can Teach Us About Wine Investing

wine investing
This article is brought to you in partnership with Vinovest

The coronavirus pandemic has wreaked havoc on the economy. Markets are slumping. Inflation is on the rise. And we’re not even out of the woods yet. These thorny financial factors have left retail investors in a tizzy – well, except for those who are swimming in the pool of fine wine investing.

Fine wine has weathered the economic storm with ease. When the Dow Jones and S&P 500 dropped more than 22% in the first quarter last year, the Vinovest 100 grew 1.1%. This remarkable performance has taught us three important lessons about wine investing.

Lesson 1: Maintain a Diversified Portfolio

You don’t need to be a financial guru to know that putting all your eggs in one basket is a recipe for disaster (or omelets.) Spreading around your eggs, or in this case, investments, is an essential part of building an investment portfolio. Here’s the problem: most people don’t do this.

Too many people are content with only investing in stocks, bonds, and mutual funds. This investment strategy may work fine in a bull market. However, a bear market will expose its Achilles heel.

That’s because stocks, bonds, and mutual funds rise and fall in value due to similar factors, such as company earnings, interest rates, dividends, and corporate management. Does fine wine care about these factors? Absolutely not. Fine wine is not susceptible to the same market forces as traditional investments. Factors that influence the price of fine wine include:

–   A winery’s reputation

–   Annual harvest yields

–   Consumer tastes

–   Tariffs

–   Terroir

–   Weather

–   The wine’s age

As a result, fine wine has little correlation with the stock market. The economy might soar or plummet, and wine will maintain its steady upward trajectory. It’s why sage investors are adding fine wine to their portfolio to offset market volatility.

Lesson 2: Fine Wine Resists Recessions

No investment is recession-proof. Fine wine offers the next best thing, though. It provides investors a way to protect their portfolios when the economy takes a nosedive. We have seen this phenomenon time and again, not just during the Covid-19 Recession.

During the Great Recession in 2008, stock prices fell 52%. The Fed had to lower interest rates to near zero, and panicked investors caused a run on money market funds. What happened to the price of fine wine? It boomed. From December 2007 to June 2009, the Liv-ex Fine Wine 100 (a fine wine index) returned 25.51% on investment.

The same thing happened during the dot-com bubble. The Nasdaq Composite stock market index reached an all-time high in March 2000. By October 2002, it was down 78%. As you can probably guess, the Liv-ex Fine Wine 100 rose in value during that same span.

Why does fine wine resist recessions? A low correlation with the stock market helps. So too does a unique set of market forces when compared to traditional investments. Perhaps most importantly, people enjoy fine wine regardless of the economic conditions. Silicon Valley Bank Wine Division founder Rob McMillian summed up this sentiment well, saying:

“We have to start the conversation by recognizing that people enjoy wine in good times and stressful times. Wine investing is not recession proof, but it is recession resistant. In the same way, it might not be virus proof, but it will prove virus resistant from an economic perspective. There is no chance we will see sweeping abstinence as a consequence of the virus.”

Lesson 3: Fine Wine Reduces Portfolio Volatility

The stock market is volatile. Fine wine is not. If we’re being honest, the two are not even close.

Stock market prices resemble a roller coaster because they’re driven by human emotion. (Meme stocks, anyone?). Investors may notice a significant decline in their portfolio and sell out of fear. When this panic compounds, it can trigger dramatic swings in the stock market.

Wine prices have bond-like stability. Since it is a private investment, investors can avoid the fluctuations that come with public investments. The price is also tied to a physical asset (the bottle of wine.) That’s not the case with share prices, which investors only own on paper. 

Just look at the night and day difference between the volatility of the Liv-ex Fine Wine 1000 and benchmark equities over the last 15 years.

wine investing

Now, some investors might say, “Sure, volatility isn’t good in the short-term. In the long-term, though, it’s no big deal.” We beg to differ. Based on the chart, investors can expect to see volatility between 5% and 15% each year. That volatility hurts compounding, making it hard for your initial earning to generate additional earnings. An asset that slowly but steadily gains value will work wonders for your bottom line. 

How to Invest in Fine Wine

Historically, wine investing has been reserved for the ultra-wealthy. (The average wine cellar alone costs $15,000 to $62,000.) That’s no longer the case. Investing platforms like Vinovest make it easy to build, store, and track a portfolio of world-class wines.

Here’s how it works:

1)         Create a Vinovest account. That includes filling out a brief questionnaire about your investing preferences.

2)         Fund your account. Vinovest offers four tiers with a range of benefits.

3)         Build your portfolio. Vinovest portfolio advisors buy the best wine for your portfolio at the most competitive rates.

4)         Watch your portfolio blossom. Over the last 30 years, fine wine has outperformed the S&P 500

If you have any questions about the process, Vinovest’s teams of knowledge and friendly portfolio advisors are standing by to assist you. Get started by visiting today.

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