Returns, risks and scams: thinking clearly about wine and money

A return is how much something gained or lost, usually shown as a percentage of what you paid. If a bottle bought for $100 later sells for $200, the total return is 100%. That figure, counted in plain dollars, is the nominal return.

But a dollar buys less every year, because prices in general creep up. That creep is inflation. If everyday prices rose 30% over the same period, part of your bottle's gain was just keeping pace. The real return is what is left after inflation, and it tells you whether you can actually buy more stuff than before. A handy rule for one year: real return is roughly the nominal return minus the inflation rate. If something rises 5% in a year when inflation is 3%, the real return is roughly 2%.

Total returns hide time. A 100% gain in five years is impressive; the same gain over thirty years is not. To compare fairly, we use the compound annual growth rate, or CAGR: the steady yearly rate that would turn the starting value into the ending value. It is compound because each year's growth builds on the last, just as interest in a savings account earns interest of its own.

A quick way to estimate it is the rule of 72: divide 72 by the number of years something took to double, and you get its rough yearly growth rate. Doubling in 10 years is about 7% a year. Doubling in 6 years is about 12% a year. Doubling in 24 years is only about 3% a year, which may barely beat inflation.

Put it together with made-up round numbers. A bottle goes from $100 to $200 in ten years: about 7% a year nominal. If inflation averaged 3% a year, the real return was roughly 4% a year. Still positive, but a long way from the headline doubled.

Remember Always ask over how many years, and after inflation: CAGR turns a total gain into a yearly rate, and the real return takes inflation away.

Risk, in money terms, is the chance that things turn out differently from what you hoped, especially worse. Two measures help describe it. Volatility is how much a price jumps around from month to month or year to year. Drawdown is how far a price falls from its highest point before it recovers. A collection that peaks at $10,000 and slides to $7,000 has had a 30% drawdown.

Drawdowns are harder to recover from than they look. After a 50% fall, $1,000 becomes $500, and it now needs to rise 100% just to get back to $1,000. After a 30% fall it needs to rise about 43%.

Fine wine has had dramatic swings. Prices of top Bordeaux climbed steeply into 2011, driven partly by fast-growing demand from buyers in China, then fell for several years. More recently, fine-wine prices rose strongly in 2021 and 2022 and then fell back in 2023 and 2024. Indices such as the Liv-ex Fine Wine 100, which tracks the prices of a basket of widely traded fine wines, show both moves.

Two lessons follow. First, anyone who bought near a peak could wait many years to see their money again, and some never do. Second, wine prices are also less precise than they look, because many wines trade rarely. An index can look calmer than the experience of an owner who actually tries to sell in a falling market. Past performance does not predict the future, in wine as anywhere else.

Remember Volatility is how much prices swing; drawdown is how far they fall from a peak, and big falls need even bigger rises to recover.

Wine has attracted investment scams for decades, and regulators in several countries have warned about them. In many places, wine is not a regulated investment, so the protections people expect from a bank or a fund may simply not apply. The pattern is familiar enough to learn.

Warning signs to recognise:

An unexpected call or message from a company you have never contacted, offering to make you money. Promises of high or guaranteed returns, often with smooth charts of the past. No honest seller can guarantee what a wine will be worth. Pressure to decide fast, because the offer will close today. Prices well above what the same wine sells for elsewhere, which you can check against merchants and auction results. Wine you never see: it is said to be in a warehouse, but you cannot get a statement from the warehouse in your own name or arrange delivery. Requests to pay more fees before you can sell or collect.

A cruel second wave often follows. People who lost money are contacted by a firm offering to recover it, for a fee. These recovery offers are frequently scams by the same groups.

Good habits protect anyone. Check prices independently. Confirm with the warehouse directly that wine is held in your name. Look up a firm on official warning lists, such as the US Securities and Exchange Commission's investor education site or the UK Financial Conduct Authority's ScamSmart pages. Never let a stranger rush you. If something sounds too good to be true, it almost always is.

Remember Cold contact, guaranteed returns, pressure, inflated prices and wine you can never verify or collect are the classic signs of a wine scam.