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03 December 2021

Bye bye bonds! Here's to a stable investment.

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Bonds might be the low-risk investment go-to, but fine wine also offers low-risk characteristics, and a whole lot more...

As we head towards the end of another turbulent year, it’s time for a period of reflection and to consider new goals for the forthcoming year and beyond. Family, health and career are bound to be on the ‘to-ponder’ list, and so should your finances – or more specifically, your investments. 

It’s no secret that the ups and downs of the last couple of years – the ongoing pandemic, political turmoil, the seemingly never-ending question of Brexit – have led to several swings in sentiment in traditional investment markets.

Although equity markets have performed very well amid global monetary and fiscal stimulus, there have been bumps along the way, including their worst month of the year in September, driven by a multitude of economic factors.

In uncertain times, government bonds typically form an important financial instrument for investors, and understandably so. While they don’t offer particularly heart-fluttering returns they are generally viewed as stable, acting as a shock absorber for the diversified portfolio when the stock market starts heading south.

But the macro backdrop is changing. Economic growth is recovering around the world while inflation in several major economies has been on the rise. Higher inflation hurts bond investments by eroding the value of a bond’s yield. Additionally, the US Federal Reserve has announced plans to reduce the pace of its monthly bond purchases – the first step toward pulling back on the massive amount of help it had been providing markets and the economy in the wake of COVID-19. This could lead to higher interest rates, leading to more volatility in mainstream financial markets.

 

Thinking outside the bonds

But bonds aren’t the only safe-haven option. An increasing number of investors are now turning to fine wine as an alternative to traditional financial instruments, taking advantage of its stability, high returns and the unique pleasures of investing in a tangible asset that can be physically enjoyed.

The standout headline for wine investment – and what all investors really want to know about – is its performance. The last 30 years are proof that fine wine is one of the best performing assets, with a compound annual growth rate of 10%. It also consistently outperforms other investments, including the FTSE 100, ever-popular gold and other collectibles, such as cars and jewellery.

But smart investors know it’s not all about returns, as lucrative as those from fine wine may be. The past two years have really underscored fine wine as a resilient investment. For example, when the COVID-19 pandemic hit in early 2020, fine wine’s downturn was both shorter and less severe than most mainstream financial assets. Things looked similar during the global financial crisis of 2008-2009.

This isn’t to say that fine wine is completely insulated from market risks, but different market dynamics provide a degree of separation from volatility in mainstream financial markets. As we head into a new, less certain macro backdrop amid inflation and shifting central bank policy, fine wine could form an important source of diversification away from bonds and equities.

 

Beyond the financial

So far, so reliable. But what really sets fine wine apart from bonds is that it’s interesting. It’s a sexy investment with its own rich history, flourishing culture and plentiful opportunities to get hands on with it in the real world. Bordeaux is, of course, the posterchild of fine wine, but the landscape affords seemingly endless avenues for exploration.

As wine continues to diversify and expand as new regions and producers gain attention, investors will see more opportunities for continued performance in different backdrops. The future looks bright for many areas of emerging wine regions because of improving quality, and distribution channels are also widening, boosted by the rise in automated trading which has increased liquidity and accessibility. This in turn provides ample prospects for more gung-ho investors to identify alpha opportunities.

Of course, fine wine investment is an obvious choice for the burgeoning wine aficionado, but would-be investors needn’t have an encyclopaedic knowledge of grape varietals or terroir to take advantage of its investment potential. A reputable firm, such as Cult Wines, will help guide you through all of your options to build a diversified portfolio based entirely on your preferences, allowing you to be as hands on as you wish. And in the future, you can toast to your returns with a glass of the very wine that helped you achieve them. To good wealth!