Investing in wine can seem intimidating for newcomers. Learn what constitutes a “fine wine” and how the market operates.

Wine’s historical and cultural mystique can make it an intimidating investment prospect compared to, say, gold or real estate. Some of this mystique is well-founded: the learning curve for wine investors can be steep, involving seemingly obscure details such as the value of specific vineyards and vintages, or how best to store delicate bottles.

Despite these barriers to entry, fine wines can sometimes offer investors better risk-adjusted returns than more traditional portfolio diversification strategies. The secondary market for fine wine speaks for itself, currently sitting at around $5 billion.Observations of the Liv-ex Fine Wine 100 Index, which tracks the price movement of 100 of the most actively traded wines in the world, showed returns over a 10-year period exceeding that for FTSE and S&P 500, with lower volatility than gold.2  The first step towards participating in this market is understanding the differences between a Friday night treat and an asset worth preserving.

What Wines Are Collectable?

Investment-grade fine wines are distinguished from mass-market peers by their ability to age, their value on the secondary market, and producers’ long track record for excellence,  according to Brian Ward, director of wine for the Winston Art Group.In the global hierarchy of fine wines, most collectors look to the famous regions of France for truly transcendent bottles. Bordeaux, which produces some 900 million bottles yearly, or nearly 1.5% of the world’s wine supply,leads the pack, usually followed by Burgundy.

However, only a tiny fraction of Bordeaux sold comes from any of the five First Growth chateaus deemed to be la crème de la crème of collectable wine — Chateau Lafite Rothschild, Chateau Latour, Chateau Margaux, Chateau Haut-Brion, and Chateau Mouton Rothschild. First Growth wines typically perform well in the secondary market, and are renowned for stellar consumption quality.5 But in recent years, Burgundy, where the acreage is one-quarter the size, has surpassed Bordeaux at auction in top lots, with brands such as Domaine de la Romanée Conti, Leroy and Armand Rousseau.

For other traditionally reliable investments look to France also for vintage champagne, which is made with grapes from a single year’s harvest, and often earns a place in a well-diversified wine portfolio because it ages well and is relatively scarce.6 Beyond France, promising collectibles include U.S. Napa Valley Cabernet Sauvignon and, more recently, Barolos and Super Tuscans from Italy.7

What Influences the Price of Wine?

The top drivers of value for investment-grade wines are vintage quality, provenance, rarity and ability to age.8 Importantly, the inherently finite nature of the supply sets wine apart from most other commodities. Unlike gold or silver, wines are made unique by their location and year of production, and, once consumed, they cannot be replaced.

Even with powerful wine brands, scarcity can drive prices higher. As an example, in 2012, Domaine de la Romanée Conti in Burgundy produced fewer than 4,500 bottles, which now sell for upwards of $13,000 per bottle; by comparison, First Growth Lafite from Bordeaux reliably produces 15,000 to 20,000 bottles per year, which sell for closer to $500 per bottle.9

Tracing the demand for such a unique asset is a fascinating project in itself. Because the quality of wine can’t be ascertained before consumption, buyers often rely on expert opinion, giving certain individuals vast influence over prices, while the emergence of new markets, such as China and Hong Kong, has had a noticeable effect on demand in recent years. Also, wine behaves as a luxury Veblen good—demand can rise in tandem with price. Like any appreciating asset, investing in fine wine is ultimately informed guesswork. According to Charles Curtis, wine specialist at Gurr Johns, “Fine-quality young wines are as fungible a commodity as collectible watches, for example. However, as the wine ages, other factors such as condition and provenance become much more important, and each bottle that comes to market has its own history, much as a work of art does.”10

Costs and Considerations When Investing in Wine

Fine wine’s particular time horizon has to be considered before investing. Beginner collectors should be prepared to wait six to ten years before selling, as most fine wines need time to mature before reaching peak drinkability and demand in the secondary market.11 In addition, most wine auction sites prefer to sell wine in sets of three, six or 12 bottles, with certain exchanges requiring full cases of 12 bottles. Purchasing with the intention to sell requires at least three bottles.

Potential investors should also consider the costs of building and maintaining a wine cellar. “Improper storage can destroy asset value,” says Curtis. Between the costs of a cooling unit, racking and installation, starting a wine cellar could cost $10,000-$15,000 in initial outlay, with additional annual maintenance upkeep and insurance costs.12

How to Buy Wines for Investing

In recent decades, the wine market has become vastly more accessible. The establishment of the London Vintners Exchange (Liv-ex), a global platform for wine trading and indexing, has led to more transparent pricing and information. However, since direct trading on the Liv-ex is only available to professional wine merchants, most private investors purchase their wines directly through distributors, auction houses or the secondary market via fine wine retailers. Savvy investors may also be able to leverage arbitrage opportunities between the three largest markets, New York, Hong Kong and London, in order to lower prices and tax load.13

Another method is to buy wines en primeur, or through wine futures, which allow you to invest in wine while it is still in the barrel. You can purchase such futures up to 18 months before the official release of a vintage. However, note that the value of the wine isn’t guaranteed and may actually decline between the time of purchase and time of sale.14

For experienced wine collectors, auctions are more than mere opportunities to buy or sell assets, they are a place to come and enjoy the overall atmosphere of fine wine and dining. “Collectors are different at the highest level — they move in the same circles, tasting groups and events, and don’t buy wines like stocks and bonds. There is passion behind the act and a thrill associated with the chase,” says Clifford Korn, managing director of sales at Acker Merrall & Condit, America’s oldest fine wine merchant.

Enjoying Wine Beyond the Monetary Gain

You should be aware of the risk for fraud when investing in fine wines. Given sparse regulation, most of the responsibility for quality control rests with the asset owner. Wine investors can’t be too careful when verifying the pedigree of new purchases and safeguarding existing collections using proper storage techniques.15

Lastly, as a potential investor, it is important to remember that the value of a bottle of wine is ultimately derived from someone’s desire to drink it. As Korn advises all his clients, “If you like Pinot Noir, don’t invest solely in Cabernet because it’s popular. If the market shifts and you are stuck with a cellar full of wine you had planned to sell, you should ideally be able to enjoy drinking some of it.” And as most wine collectors would probably admit, there is more to investing in wine than pure monetary gain. After all, you can’t eat a bar of gold or a Picasso, but you can always drink a glass of Merlot.

Morgan Stanley Private Wealth Management