Article - RareWine Academy

Avoid Pitfalls When Investing In Wine

Find out how you as a wine investor can avoid making essential mistakes and avoid the pitfalls of wine investment...

In these years, we are experiencing a steadily increasing interest in investing in wine, and with good reason. There are stable returns to be gained if you steer clear of the biggest pitfalls. With increasing interest also follows many prejudices, myths and questions around the subject. That is why we have gathered answers to a number of the questions we are most often faced with, so that you can steer clear of the biggest pitfalls and make money by investing in wine.

How To Qualify A Wine For Investment?

A condition for a wine to increase in price is, in addition to having storage potential, that production is limited and cannot be increased by e.g. acquisition of new fields. In addition, the wine must be drunk on an ongoing basis, and demand must be expected to increase in the future - e.g. when the number of rich people in the world increases and the interest in wine increases correspondingly.

Depending on the criteria set, at most somewhere between 0.1% and 1% of the world's wines qualify for investment. As a rule of thumb, it is the best, most expensive and rarest wines from the oldest and most famous producers that are suitable for investment. Remember you can always find our recommendations right here.

Historically, wine from Bordeaux has become the cornerstone of classic wine investment, but declining demand combined with increased speculation means, prices today are high and, in many cases, do not match demand - at least not if we are searching for possible returns.

With a return of 159%, Burgundy has been the best wine investment of the last 10 years*, while Champagne and Italian wine, in recent years have entered the scene, and together with the Burgundy wines form the basis of a wine investment in 2020. If you want even higher returns and a higher risk, one can also add whiskey, which historically has outperformed wine, to its portfolio.

*Liv-ex Burgundy 150 EUR index in the period May 2010 to April 2020

Should I invest In Small Or Large Amounts?

Already when you invest, you should keep in mind how to sell the wines again. In addition to the fact that at that time there must be a marked for the wine you sell, the wines must also be easy to handle for the new buyer, who will often have resale to the end-users in mind. Therefore, only buy wine in perfect condition, in whole boxes and original packaging. Buy fewer different winemakers in larger volumes, as small quantities often keep the professional buyers away or they will ask for discounts. The exception is the most fine and rare wines in the world.

What Does VAT Mean For My Investment?

If you buy wine including VAT and you do not have a deduction for VAT - e.g. if you invest for free funds or through a company without VAT deduction (typically a holding company), this is in practice equivalent to paying an additional price corresponding to the VAT of your country, which you will never get compensated. Buying wine with VAT that is non-refundable and is therefore equivalent to buying stocks at a price of 125 (Example - Danish VAT is 25 %), when everyone else is trading at a price of 100.

As a private individual, your only option to invest in wine without VAT is to have the wines delivered duty-free, and exempted tax and VAT to a bonded warehouse. RareWine Invest operates Nordic Freeport located north of Aalborg, Denmark, which is the only bonded warehouse in the EU that allow private individuals to store wine and spirits without customs duties, taxes and VAT.

How Should Investment Wine Be Stored?

Wine should be stored at a stable temperature of between 11 and 14 degrees and at a humidity of between 70% and 80%. Despite of this, the wines must not be exposed to sunlight or vibrations from e.g. heavy traffic.

Few people who invest in wine are responsible for the storage themselves and instead let the wines be stored in an external wine warehouse, where in addition to the right conditions, a logbook on temperature and humidity is also kept, as well as security, alarm and insurance. Due to large-scale operation, the price for this is often lower than you would be able to store it for yourself. Moreover, handling of the wine should be accounted for as well.

In Denmark, there are a handful of wine warehouses that offer storage of wine, while only Nordic Freeport has the status of a bonded warehouse and can thus offer storage of wine without customs duty, tax and VAT, which is a prerequisite for the optimal investment. Nordic Freeport's price for storage, handling and insurance is between 0.7% of the value of the wine annually.

What Are The Costs If I Store Investment Wine Myself?

From an economic and practical point of view, it usually not advisable to store the wines yourself. However, if you are still considering storing your own wine, you should set a budget for what it costs to establish your own wine cellar and / or purchase wine cabinets and bear the current costs of rent, electricity consumption, maintenance, insurance and burglar alarms. Depending on which solution you choose, it costs between 1.5% and 4% of the value of the wine annually to store a bottle of wine with a purchase price of approx. € 150 in your own "cellar".

Many people forget that a breakdown in the cooling system can lead to a risk of sudden and irreparable damage to your wines. Therefore, you should install an alarm system for monitoring temperature and humidity. The system should be able to keep a logbook so that you can provide future buyers with documentation for proper storage. However, you must be prepared for the fact that not everyone accepts unofficial logbooks as proof of storage history, as there are countless examples of storage history being fabricated, if e.g. the basement has been too hot for a while. So, remember that if the cooling system breaks down, you should be able to get a technician at short notice - even if you are traveling.

Finally, you need to decide for yourself whether you want to live on top of a treasury that increases the risk of burglary and robbery. It is not without reason that most people choose to store particularly expensive jewelry and watches in a safe instead of at home. And remember that if you store the wine yourself at home, then customs, VAT and tax must be paid and thus the profit disappears.

How Long Investment Horizon Should I Expect?

Wine investment is basically a long-term and maintenance-free investment. You must expect an investment horizon of at least 5 years and preferably 10 years. The large fluctuations from day to day or from month to month rarely occur. Therefore, you should not expect major returns for the first few years. Day trading is thus reserved for professional wine traders, who make money on impeccable merchant skills more than fluctuations in day-to-day prices, which makes day trading of wine an impossibility from a classic investment perspective.

However, it happens that situations arise that can give the well-informed investor an excess return. When closing in to holidays, such as the Chinese New Year, demand may shortly explode and some wines may be temporarily sold at way above market price.

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