- How wine can help us understand the 4 Pillars of investing.
Bitcoin, Currency trading, High-End real estate, Art, Expensive timepieces, Dogecoin, Rare whiskey…
All exciting alternative investments which, unfortunately will make more people lose money than make money.
While there may be a place for these alternative investment strategies, they should not be the cornerstone of your portfolio. They are often misunderstood, speculative in nature and used as a way get-rich-quick.
Throughout the decades however, the 4 Primary Asset classes who have stood the test of time and created long-term, generational wealth include:
-the MONEY MARKET
I vividly remember back when I was in primary school how my father was trying to teach me about these 4 different asset classes , their characteristics and how they should be used in an investment portfolio. We went through it a couple of times, but I struggled to grasp these concepts and the way they behave.
Fortunately, throughout the years I have familiarized myself with them and have recently created a video where I compare each of these asset classes to a red wine cultivar. Not only because I love red wine and appreciate the work that goes into every bottle, but I also found there to be striking similarities between these different varietals and the 4 asset class types.
You can watch the entire video HERE.
- The Money Market vs Merlot
The money market is a short-term debt instrument with no volatility, where an investor lends money to a bank or large institution an gets interest in return. It is a safe and straightforward way to let your money grow with very few to no surprises, good for a short-term investment.
I would compare that to a nice smooth Merlot. This uncomplex cultivar is full of dark fruit flavors and will have little to no surprises. It is a safe option to take to a dinner, give as a gift or to introduce to someone who is new to red wines.
- Bonds vs Pinotage
Like the Money Market, Bonds is also a debt- Instrument, but with a longer duration. An investor lends money to the government or corporate, where they issue a bond and pay interest to the investor in return. Depending on the type of bond, this is also a safe asset class with little volatility over the long term and very few surprises.
The wine I would compare that with is a Pinotage. Like with the Merlot, it is not a complex wine and will be enjoyed by most people. No real surprises here and great for a short to medium term investment either on its own, or to be used along with other cultivars to make a nice Cape Blend.
- Shares vs Shiraz
While the Money Market and Bonds are known as the ‘Defensive’ asset classes, Shares is the first of our ‘Growth’ asset class.
In simple terms this means higher risk, higher potential reward. Here you want to know what you are getting yourself into as there might be a lot of surprises, which if you are not sure what you are doing, might put you off from investing forever.
Shiraz therefore is not a wine I would recommend to someone who is new to red wine. It is a complex, spicy and peppery red wine, which will kick you on the side off the tongue. However, if you leave a Shiraz for a couple of years and you appreciate its complexity and flavors, it can be an beautiful wine and deliver incredible results.
- Listed property vs Cabernet Sauvignon.
The Second of our growth asset classes is Listed Property. Contrary to buying physical property which you own and manage, with listed property you buy a share of the company who owns and manage the property and gives you a interest in return -think Growthpoint or Redefine Property.
Over the last couple of decades, listed property provided the highest returns of the 4 asset classes for investors, until March 2020 changed the way we work and perhaps the future of listed property forever.
Cabernet Sauvignon is known to many as the king of red wines and is a full bodied, complex wine which is normally high in tannins. It is not a wine I would present to someone who is new to red wines as the tannins and dryness might leave a ‘sandpaper’ like feel on their tongue- especially if it is a young Cab Sav. Yet, when left to age for a couple of years, coupled with a more mature palate, this cultivar can reward you handsomely!
Selecting your allocation to each of these various asset classes is the 1st place to start when investing & should form the foundation of your investment portfolio.
Given your risk profile: Conservative, Moderate or Aggressive, the % allocation towards these various asset classes will differ.
Kindly contact your wealth manager should you have any questions or comments.
Geo Botha B.Com Honours, CFP ®