Building a well-balanced investment portfolio can be difficult.
With so many different investments to choose from, achieving strong diversification while also mitigating risk is no simple task.
For many years, most experts recommended a traditional 60/40 split when it came to portfolio allocation. This split meant that 60% of your portfolio should be in stocks and 40% in bonds.
However, over the last few years, alternative investments have become far more accessible for the everyday investor.
So, what are alternative investments? Where does wine fit in? And how much should you invest in alternative investments like wine?
Let’s dive in!
What Are Alternative Investments?
Alternative investments or ‘alts’ is a broad term.
Alts are really any investment opportunity outside traditional investments like stocks and bonds.
Here are a few examples:
- Real Estate
- Precious Metals
- Hedge Funds
- Venture Capital
Portfolios that include alternative investments may achieve a reduced risk profile vs portfolios with 100% allocation to stocks.
This is because alternative investments are not highly correlated with the stock market. When the stock market faces uncertainty, alternative investments typically perform well.
For example, in 2008 amidst the housing and stock market crash, many alternative investments were hardly impacted.
The S&P 500 dropped 38% while the Liv-Ex 1000 (an index tracking fine wine prices) fell less than 1%.
Alternative Investment Allocation
Getting the right mix for your total investment portfolio can take some time and planning.
Over time, alternative investments have become far more widespread. In fact, BlackRock found that in 1996, alternative investments made up just 5% of global pensions. Today however, alts made up as much as 26% of global pensions.
- Many experts agree that a healthy portfolio could have between 15% and 30% allocated to alternative investments.
- The remaining 70% to 85% would then be allocated to traditional assets like stocks and bonds.
Of that 15% to 30% allocated to alternative investments, the next decision is which alternative assets to include. It could be in real estate, art, wine, or collectibles.
Wine Portfolio Allocation Example
This is for demonstration purposes only, and not financial advice.
In this example above, 60% of the total portfolio is allocated to stocks with 25% allocated to bonds.
As shown above, 15% of the total portfolio is made up of alternative investments like real estate, wine, and cryptocurrency.
Within each of the allocation percentages, it is wise to diversify.
For example, in the illustration above, 60% of the portfolio was allocated to stocks. Of that 60%, an investor should purchase a number of stocks across multiple sectors or purchase an index fund like the S&P 500.
Similarly, when investing in wine, it is generally wiser to invest in a collection of wines rather than one bottle.
How Much Should You Invest In Wine?
How much you want to invest in wine depends on your time horizon, goals, and risk tolerance.
Consider this. Wine is typically a long term investment that is not as liquid as a stock investment. With this in mind, if you need cash or more liquid investments, you may want to allocate less or none to wine.
Additionally, wine as a whole, as shown by the Liv-Ex Fine Wine 1000 index, which tracks the performance of roughly 1,000 unique wines, has historically performed in line with the S&P 500 with less volatility.
However, if you were to invest in wine and purchase a single or few bottle(s), then your performance may not match that of fine wine indices as you are buying just a few specific bottles.
Many wine investing experts recommend building a wine collection with at least $10,000 to start. This helps ensure a diverse collection of wines from multiple geographic regions.
When adding wine to your portfolio, it may be helpful to talk with a financial advisor.
If you do want to invest in wine, be sure to check out our complete wine investing guide here.