Ferraris, Fine Wines, And The Uncertain Alternative Investments 

Ever since Brexit, we’ve seen a couple of articles emerge suggesting this sort of uncertainty will cause many investors to spend more time thinking about investing in “real assets” such as real estate (land), gold, and now…. The cars you dream about and the fine wines you wouldn’t dare drink. Wealth Management is out with an enticing article on Ferrari’s, Cru wines, rare coins, and collectible jewelry “going mainstream” on the heels of ultra-low interest rates and volatile stocks.

Alternative Investments, Ferrari, Fine Wine
Photo by Eric Lumsden
Ferraris, Fine Wines, And The Uncertain Alternative Investments

And fine wine saw its largest positive monthly movement since 2010 in July with the Liv-ex Fine Wine Investables index, which tracks around 200 Bordeaux red wines from 24 leading producers, up by 4.5 percent. It is up 13.8 percent so far this year, compared with 6.9 percent for the S&P 500 and 8.9 percent for the FTSE 100.

“As a physical asset, fine wine tends to perform well in periods of uncertainty…and is also not linked to the prices of other assets in most circumstances,” said Andrew della Casa, Founding Director of The Wine Investment Fund.

…returns on classic cars jumped 17 percent, coins generated 6 percent while jewellery delivered 4 percent.

But over a five-year period, cars, coins and jewellery returned 161 percent, 73 percent and 63 percent respectively, eclipsing Britain’s FTSE-100 stock index, which was up 15 percent since the start of 2011.

This isn’t the first time these sort of investments have “caught investors’ eyes.” Remember Bloomberg Vomiting Alternative Investments a while back. What’s not to be intrigued by? Bragging to your friends about your newly devote passion into rare sports cars AND it gives you a diversified return!

But, back to reality. We can’t say this isn’t an actual possibility – some people have made solid returns on these types of “investments.” But if you haven’t already thought of the hundreds of downsides to that reality, let’s point out a few:  One, Wealth Management cites indices for cars and wines, while your single investment into a specific car or wine doesn’t mean you’re going to get the same return as index that tracks 200 wines.  If you think hedge fund indices have survivorship and selection bias issues – we wonder what would be found peeling back the curtain on those indices. Two, these aren’t exchange traded futures. And they’re not even illiquid private companies. We’re talking super niche markets here where you have to find a buyer for these things to get a return back. You aren’t likely to see rare Ferraris on the list of most liquid markets any time soon. Finally, none of these articles about these types of investments actually talk about what kind of money you might lose, or how long you might have to wait before the “real assets” you purchase pull out of a drawdown.

Andrew Shirley, author of the Knight Frank Wealth Report lays it out pretty simply:

“You should still only be buying the investments of passion that you will enjoy owning and will give you pleasure even if their value goes down – there is certainly no guarantee that values will continue to rise.

“There is an argument that such investments add diversity to portfolios, provide a hedge against inflation, and unlike equity-based investments, offer a degree of tangibility… but like gold they tend not to generate any income and can also be illiquid, and subject to changes in taste and fashion.”

The takeaway? Only consider these sort of “investments” if you’re at peace that the most you could get out of (car, wine, coin, jewelry) is bragging about it, not because you want it to provide an estimated return for retirement. For that, we recommend reading our whitepaper about the basic questions you should answer about Alternative Investments before investing.