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All You Need to Know About Investing in Whiskey

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Fueled by rising demand in developing countries like China and India, whiskey has become an increasingly attractive investment option.

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People keen to grow their income typically turn to equities, hoping to make a killing through studying the market and making the appropriate moves. The trouble, however, is that the market is vast and unpredictable. Consider the Dow Jones Index (^DJI) and the S&P 500 (^GSPC), two broad barometers of the state of the equities market. After a year full of spectacular climbs and gut-wrenching plunges, the Dow ended 2011 up a teeny 5.5% while the S&P 500 basically stayed flat. In other words, a year full of sound and fury signifying nothing, as Shakespeare would say.

If you're tired of the volatility of the stock market but want to do something with your money besides parking it in a bank or under your mattress, perhaps you could turn to investing in whiskey.

Yes, while the market for fine wines is already saturated, the one for precious whiskeys is still expanding energetically. Four years ago, 1,500 bottles of single malt -- the most valuable form of whiskey -- were sold at auctions. Last year, the figure grew to 8,500. The value of the auction market, currently at about $5.7 million, is predicted to rise to some $27 million by 2020.

More importantly, whiskeys also have the potential to provide tantalizing returns. If you had invested in the 100 best-performing whiskeys in 2008, you would have receieved a 163% return in 2011.

The most expensive whiskey today is a 62-year-old Dalmore single malt, of which only 12 were ever produced. Seven years ago, one fetched a princely $51,000. In September last year, a Chinese businessman bought another bottle for $195,000, which represents a 282% increase. Granted, that's peanuts compared to Green Mountain Coffee Roasters' (GMCR) 3,500% increase in the past five years, but who would take caffeine over a good shot of whiskey?

Michael Kappen, a former banker who started the World Whisky Index, expects whiskey investments to return annual yields at an impressive 12%.

Also, unlike wine, whiskey, once bottled, does not age and can serve as a great long-term investment.

If you're curious about investing in whiskey but don't know where to start, here's a quick primer:

Which whiskeys should one invest in?

Whiskey prices follow the simple logic of supply and demand, says expert collector Mahesh Patel, who hosts an annual whiskey trade show called the Universal Whisky Experience in Las Vegas. As such, he advices would-be investors to always go for limited-edition bottles.

"Don't go for something off the shelf, even if it's 10, 12, 80 years old or whatever because those are generally not limited production. Those are created every year, whereas limited-run productions are maybe 100 bottles or 10,000 bottles -- at 10,000 bottles, they're going to be lower in price, but as people drink them, supply gets reduced and the prices go up immediately."

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No positions in stocks mentioned.
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