Business & Government

Stocks, Bonds and Wine: For Some Investors, Collectibles Provide Diversity

July 21, 2023 • By Bryan McKenzie, bkm4s@virginia.edu Bryan McKenzie, bkm4s@virginia.edu

Rodney Sullivan in a wine cellar looking at a bottle of wine

Investing in collectibles such as wine to hedge against economic insecurity only works if you can afford to sell no wine before it’s time, says Darden School of Business expert Rodney Sullivan. (Photo by Dan Addison, University Communications)

That richly intense flavors of umami, sweet cinnamon, Christmas cake, camphor, petrol, lemongrass and Belgian chocolate could be the sweet taste of a solid financial investment.

Then again, maybe not, especially if you need your assets to be more liquid than that case of $327-per-bottle 1946 Toro Albala Don PX Covento Seleccion.

With rising inflation, interest rate hikes by the Federal Reserve and spirited but contradictory pronouncements by experts about the economy’s future, some investment firms and advisers have taken to television, social media and email to tout the benefits of alternative investments, specifically collectibles.

From fine wine and fine art to vintage automobiles, guitars, baseball cards, stamps, gold coins, and even commemorative Elvis Presley porcelain, collectible investments have been around for years. But the recent attention does not mean that collectibles are necessarily a good investment or that they’re for everyone.

“There are lots of investment collectibles; wine and whiskey, comic books, art, vintage automobiles – there are many,” said Rodney Sullivan, executive director of the Richard A. Mayo Center for Asset Management at the University of Virginia’s Darden School of Business. “A key requirement to be a collectible investment is that it needs to improve with age. So, you need to be in a position to hold onto that asset until you can get a good return on it, should it age gracefully. And that can take time.”

In the past decade, there has been a rise in the number of investment collaboratives and organizations dedicated to selling equity shares in collectible assets, rather than requiring investors to keep them at home.

“I view collectibles as a psychological investment, in the sense that you get psychological benefits from owning it,” Sullivan said. “Art is a great example. People love art and they love it as a collectible investment. Here, usually they buy things that they like, but that might also increase in value over time. They may display it in their home, or maybe if it’s super valuable they leave it in the care of a museum, but it’s something that they personally like and enjoy.”

With collectibles, enjoyment is key.

Most investment-grade wines are ultra-high-end wines from established wineries in France, with some in Italy. California and Australia are seeing some wines make it to investment status, experts say. (Photo by Dan Addison, University Communications)

“I think that’s an important aspect of it. Invest in something that you know, something that you understand, because you don’t want to invest in something you don’t understand. That’s the old Warren Buffett adage,” he said.

While wine, whiskey and other collectibles share the same risk for dropping in value as stocks and bonds, they do not share the same liquidity. Collectibles, like other alternative investments including hedge funds, private equity and real estate, are more difficult and more expensive to buy or sell. So it takes longer to convert collectibles and other alternative investments into cash than to sell a stock or a bond.

Buffett and his like are the type of investors who often dabble in collectibles. According to a Swiss university study in 2018, “ultra-high-net-worth individuals” held an average of 2% of their wealth in collectibles, and 36% planned to allocate a higher amount of their wealth to it over the next decade.

“This increase in demand, coupled with a relatively scarce and inelastic supply, has driven prices upward for most collectibles,” the study showed.

People with ultra-high net worth tend to have more room in their investment portfolios for alternative investments because they also have more resources to invest in more traditional market investments, such as stocks and bonds.

Rodney Sullivan sitting on a chair reading a lable on a bottle of wine in a wine cellar

To be considered an investment, wines must be able to age well and develop flavor after being bottled, often for decades. Most wines are designed to be consumed within five years, experts say. (Photo by Dan Addison, University Communications)

Some banking studies conducted in the past two years show those with ultra-high net worth may have as much as 50% of their wealth in alternative investments, mostly in real estate, hedge funds and private equity investments. Like collectibles, those investments are for the long term and are more difficult to convert to cash.

“Unlike stocks and bonds, collectibles do not create a stream of future cash flows, only the hope that you might one day sell it at a higher price than you purchased it,” Sullivan said. “So there is no intrinsic value associated with the asset, which makes it speculative in nature. You’re speculating that the price is going to go up in the future and you’re willing to wait for that to hopefully happen.”

Collectibles should be viewed with two things in mind: What is the return on investment, including the cost to buy in and cash out, and will it provide diversification benefits?

“If you look at the investment through those lenses, the return on investment before fees may make fine wine look very appealing as an investment. But after the purchase, selling, and storage fees are considered, it’s close to a net-zero return, historically speaking,” Sullivan said “Fine wine may provide some diversification benefits, but not a return on investment. So it meets one criterion for a good investment, but not the other. You have to ask yourself then, should you invest in it?”

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So for whom is that case of 1946 Toro Albala Don PX Covento Seleccion a good investment? Like so many investments, it’s someone who can afford the possible losses.

“If you have fine wine in the cellar and you go to [sell on] the market and you realize ‘Well, it’s not really worth what I’d hoped it be worth, so maybe I should drink it instead,’ then you’re fine. I think you have to be OK with whatever the outcome is if you’re going to own it as an investment,” Sullivan said.

“So, for the average person who’s investing for retirement, wine or any collectible may not be a good investment, honestly,” he said. “But if you have a very high net worth with an otherwise diversified portfolio, and you want to buy that Picasso and you love that Picasso, you’re absolutely right to do it.”