What You Need To Know To Diversify Your Portfolio

Aaron Damiano Sparkes is the founder and CEO of Whisky 1901, a leading Scotch whisky investment company headquartered in London.

Investors, both new and experienced, are constantly looking for ways to diversify and enhance their portfolios. Recently the industry has seen a shift in investors seeking alternative investment opportunities versus more traditional options.

In 2023, globally, alternative investments accounted for 42% of all strategic asset allocation (45% in Europe), according to the UBS Global Family Office Report 2024, which brings together insights from families with an average net worth of USD 2.6 billion and covers over USD 600 billion of wealth. The report classes private equity, real estate, hedge funds, gold/precious metals, and art and antiques, among others, as “alternative asset classes,” while stocks, bonds and cash are considered “traditional asset classes.” Notably, the alternative investment industry has developed significantly with projections showing a 7% increase in investments from 2020-2024.

Beyond The Joy Of Ownership

For many, investments in alternative investments, particularly luxury assets such as watches, classic cars and alcohol such as wine or whisky, is an exciting opportunity to satisfy a passion, as well as offer potential financial returns. The “joy of ownership” came out on top of “investment” as the No.1 reason ultra-high-net-worth individuals (UHNWIs) collect investments of passion, according to the Knight Frank Wealth Report 2024.

A luxury timepiece can be worn and appreciated for its aesthetics, a piece of automotive history can be driven, and you can savor the taste of a premium Scotch, but the head must work in tandem with the heart in all matters investment-related. But navigating the alternative investment market can be daunting, particularly to new investors.

With numerous options available and varied return on investment (ROI) potential, investors must employ strategic decision-making and evaluation techniques for each class of investment to maximize returns. This usually starts with determining how much, or what percentage, of their portfolio to dedicate to each asset based on appetite for risk.

With such dramatic growth in recent years, investors need to familiarize themselves with the strategies necessary to assess alternative investment options and how they can optimize their portfolio diversification.

Understanding The Alternative Investment Landscape

To fully understand the alternative investment market, investors must undertake comprehensive research into the investment’s historical performance, the market conditions and whether the investment is subject to set regulations, or partner with trusted experts in their respective fields to advise them.

For example, many traditional investments are regulated by the Financial Conduct Authority (FCA), while others, such as gold, whisky and cryptocurrencies, are not presently FCA-regulated, meaning there’s even more reason to exercise caution and seek the right advice when beginning on this journey.

Alternative assets are more flexible, but also more volatile than traditional assets, therefore investors must understand and appreciate the differences between the two investments and how this asset will fit into their investment portfolio.

Undertaking a risk assessment with an investment broker can provide investors with the knowledge to make an informed decision about investing in alternative assets.

Evaluating Strategic Investment Opportunities

While alternative investments, such as gold, wine, whisky and other luxury goods, are subject to larger fluctuations in values, ROI is usually more closely linked to market demand and inflation, whereas traditional, bank-backed, investments are more heavily swayed by geopolitical events, such as stock market crashes and employment data, and can therefore be more volatile. Rarity and maturation, in the case of whisky bottles and casks, also play a key role in their value over time.

Many alternative and inflationary-linked investments have begun to be perceived as more dependable in the long run. When it comes to wine, for example, The Liv-ex Fine Wine 100 index increased 6.8% year on year, with fine wine projecting to have a 4.9% 10-year annualized growth, according to the Carter Jonas Model Estate 2023 report. Investors also witnessed growth in the premium classic cars markets, with the HAGI Top Index reporting an 18% annual increase compared to traditional investments. But this isn’t the case for all luxury investments. Watches, for example, have seen a notable decline in value.

Notably, whisky, both in bottles and casks, continues to be an attractive investment proposition. While the Knight Frank Luxury Index showed a dip in value for rare whisky bottles in 2023, there was a 280% growth over a 10-year period, showing the huge potential for this asset in the long term. Last year, a Macallan 1926 single malt whisky was sold for £2.1 million—breaking records as the most expensive whisky bottle sold at auction. And, in 2022, a rare cask of Arberg was sold for over £16 million—it was the most expensive whisky ever recorded to be sold globally.

While these are exceptional cases, this potential is prevalent in other whisky cask investments, with the BC20 Whisky Cask Index highlighting that whisky casks have “significantly outperformed all the traditional investment options in recent years” with the industry seeing a growth of 14.95% in 2022. The Global Whisky Market Overview 2023-2028 found that whisky sales are on track to reach £99.48 billion by 2028, up from £69 billion in 2022, with a compound annual growth increase of 6.34%.

According to the Knight Frank Wealth Report 2024, choosing the right whisky cask is critical as some whiskies are more valuable than others. Hence the importance of working with only the best distilleries.

It is important to note that some alternative investments are unregulated in the U.K. and the value of investment is variable, so an investor may get back less than the amount invested, and profit is not guaranteed. Therefore, investors should always seek advice from an independent financial advisor before investing.

With alternative and traditional investments influenced by a range of industry trends, inflation and economic global events, each investment reacts differently and has varied ROI and valuations. In today’s modern investment market, investors who take advantage of a diverse portfolio and mitigate risks, with multiple assets that perform differently, will likely see their investments thrive in today’s economic market.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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