Vintage Assets by Erin Marie Miller
Fine wine has been a popular alternative investment for decades. Is it really a safe bet?
More Americans investing in wine,” proclaimed a June 13 headline in Meriden, Connecticut’s The Journal that year, accompanied by a syndicated article from the Associated Press. A similar headline, “Americans investing in wine as hedge against inflation,” followed the nextday in Oregon’s Eugene Register-Guard, with more articles about the novel investment that eschewed Wall Street cropping up in newspapers over the decades that followed. Today, with dedicated investment firms and auction houses showing up online, investing in fine wine looks slightly different than it did 52 years ago, although its appeal still lingers — especially during times of economic uncertainty.
“Alternatives get more hype when the market’s going crazy,” says Carolyn McClanahan, a certified financial planner and the founder and president of Life Planning Partners, Inc., a financial planning firm that offers investment management services. Despite their publicity, though, alternative assets — an investment class that includes tangible assets like wine, gold, art, handbags and other collectibles — can be risky. From pervasive fraud and multi-million-dollar scandals to high upfront costs with no guaranteed returns, there’s a lot for prospective investors to consider before buying alternatives, especially when it comes to vino.
A Not-So-Liquid Asset
In the modern era, there’s no shortage of options for wine collectors to dip their toes in the alternative investment market. From wine investment brokers to specialized digital platforms, wine futures or “en primeur” sold by chateaus, and even building their own cellars to auction off later, investors have plenty of choices for turning liquid into gold.
Still, the hype around alternative assets can sometimes obscure their potential risks. For fine wine, those can include hidden costs like recurring fees for cellar management and storage, and transfer taxes. In addition to a lack of regulations compared to traditional investments and uncertain returns, McClanahan says wine collections are also taxed at higher rates than traditional capital gains.
“In general, we don’t recommend (investing in wine) to clients at all because it’s just too much to deal with from a tax issue, from an estate planning issue — because you’ve got to make sure that however it’s owned, you’re titling it correctly, or making sure it passes to your heirs directly,” McClanahan says.
Still, for those who invest in wine, an abundance of caution — and funds — is critical. McClanahan also recommends that clients create a personal investment policy, keeping alternative assets limited to five to 10% of their portfolio, which can soften the blow of wine’s illiquidity.
“Wine is very liquid as far as drinking it, but as far as money, it’s not liquid at all. It can be a challenge of when you get your money back out of it,” McClanahan says.
Look Before You Leap
Because alternative assets like wine often carry unique risks, investors need to understand what they’re getting into before opening their checkbooks.
“You really have to first appreciate what the issues are, and then decide how you want to resolve them,” says Grant Rawdin, an attorney, accountant and the founder and CEO of Wescott Financial Advisory Group, a financial consulting and wealth management firm.
Because fine wine is often viewed as a less volatile bet than stocks due to less frequent valuation and a low correlation with equity markets — a perception that isn’t always accurate— thinking about fine wine in terms of long-term investment performance can help collectors keep a level head.
Although fine wines can perform well in the long term, Rawdin says the overall state of the economy — as well as tariffs, regional agriculture and weather fluctuations — can affect the value of wine in different ways at different times, especially in the short term.
“Even though people might go there when the stock market’s rocky, if things are going poorly in the economy, generally, recessionary times, that does hurt the value of a wine portfolio,” Rawdin says, explaining that during those times, people “don’t have the same appetite for investing in an illiquid asset class that relies on consumer spending on luxury goods.”
Still, for investors who consider the proper holding time for their collections, some fine wines can yield strong long-term returns.
“In the wine portfolios today, you see French wines (have held) up reasonably well. California wines, because of a glut, (haven’t done) quite as well. And so, it’s really the absolute premier that are sort of holding the line on what the values are,” Rawdin says, adding that a “flight to historic quality” has also contributed.
Buyer Beware
Financial planning missteps aren’t the only risks wine investors should be aware of before laying down their hard-earned cash on a rare vintage. When it comes to purchasing fine wine, fraud is also a serious — and all too common — problem.
“A fraudulent bottle of wine goes from being worth $10,000 for the bottle to zero,” says Carol Cohen, a certified wine authenticator and the founder of Fine Wine Spy, a firm that offers wine authentication, appraisal and cellar management services.
When investigating the authenticity of a bottle of wine, Cohen starts by examining the bottle itself, including its condition and the historical appropriateness of its label, artwork, glass, colors, markings, appellation, cork and other key features that might verify the seller’s claims — or point to potential fraud.
Beyond the bottle’s exterior, Cohen also researches the number of bottles that were produced for the specific vintage in question, estimating how many might still realistically be in circulation after taking into account past sales and historical events that may have led to increased consumption — and depleted reserves — of that particular wine. In situations where a large number, or unusual size, of a particular wine and vintage is available on the market, this is a particularly important step.
“Follow auctions. See what’s out there. If you’re constantly seeing certain vintages of wines, you’re saying to yourself, ‘Okay, we’re talking about 1945 Mouton. How many are really out there?’ People drank them. People celebrated with them. 1945 was an important year — it was the year the war ended. People celebrated with those wines,” Cohen says.
Have Fun, But Keep Records
Despite its risks, approaching wine as an alternative asset can be rewarding when it’s done thoughtfully, especially for investors who are passionate about building unique or rare collections and have cash to spare. Still, it’s important for investors to make smart choices to avoid future problems.
While there’s no foolproof strategy for investors to avoid counterfeit wines, careful research and building relationships with reputable sellers, auction houses and digital platforms with trustworthy vetting processes can help. Cohen also cautions investors against making impulsive or passion-driven purchases, recommending that they collaborate with trained professionals to authenticate and appraise wine before investing in it.
COHEN RECOMMENDS THAT COLLECTORS DOCUMENT EACH BOTTLE’S PROVENANCE AFTER ITS ACQUISITION
Once an investment has been made, proper storage is critical for optimizing the value of a wine collection. Cohen also recommends that collectors document each bottle’s provenance after its acquisition — a business-minded move that can give them an edge later.
“Make sure it’s in your database properly. Whether you’re using an online database or you just like paper, (make sure) everything is well documented, where it came from. If there’s a problem later, you know where this came from. And also, when you go to sell it — you know, your investment has a little more value if it all can be documented,” Cohen says.
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Click here to read the article on American Wine Society Journal
