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Measuring Risks: Portfolio Adjustments in Light of Current Events
Linda Goin
  
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The oil that has gushed into the Gulf of Mexico for over 40 days as I write this article has so many implications that I find it difficult to know where to begin to talk about them all. So, for simplicity's sake, I intend to focus on your portfolio, an item that – if you have not already done so – needs a quick review to ensure that you have measured risk to your satisfaction. Risk, in this case, means the variability of returns from an asset.

First, a focus on the Gulf of Mexico region, which includes the activities within that area. The major sources of income and revenue along the Gulf include oil production, seasonal recreation (tourism) and seafood. If you have investments in any one of those areas, you may want to measure your willingness to keep investments in the following:

  1. Oil production: By the time this article is published, moratoriums on deep drilling or other factors may change. This investment is highly volatile, and I'll add factors about this issue in a few moments.
  2. Seasonal recreation: Depending upon the focus of your investments, you might look at casinos (year round), hotel and restaurant chains or private investments that you have made along the shores of the Gulf Coast (highly specialized). These investments may or may not show volatility, but you may want to keep an eye on activities in your investment as time goes on.
  3. Fishing: While most investors consider this investment a commodity, other factors may come into play, including transportation sectors.

 

The final picture on risk in the Gulf area depends upon the length of time the oil remains gushing into the Gulf of Mexico, the amount of dispersant used and the long-term inspection of how the latter chemical and the oil affects the environment. At the moment, even real estate along the Gulf shores looks grim as no one knows how much oil has been released nor does anyone know how long it will take to clean up the oil once the decapitated rig is under control.

Throughout the years I have written for BUYandHOLD, I have insisted that investors know about the products and services that are purchased for a portfolio. While oil may seem like a risky investment, especially now, the products that use petroleum are ubiquitous. A list produced by the Illinois Oil and Gas Association provides insight into how many products are created with petroleum (they've missed toothpaste on this list – check your labels for petroleum by-products such as artificial colors and mineral oil).

If you scroll down to the end of the page linked above, you'll see where consumers use more petroleum than any other natural product except for stone. While this vast use might mean that oil seems to be a wise investment, the volatility involved in the current market is a factor that may influence your decision to invest. While the oil disaster in the Gulf focuses on a single company, the actual extraction and production of oil involves many companies and many products and services. And, like many other sectors, when one company becomes the main player in the spotlight, their activities can influence the investments in other companies within a given sector.

Additionally, that list of products may influence how you invest in any given market if you are what is known as an ethical investor or if you want to avoid the risks inherent in oil altogether. As an ethical investor, you may want to examine your choices as well, as the energy industry's methodology comes under scrutiny across the board. The fact that drilling alone is considered “mining” in many states may bring certain industries – such as geothermal – under the magnifying glass.

As it stands, certain states – such as Virginia – have had offshore drilling plans cut off at the knees. The Defense Department does not want offshore exploration conducted near military operations and training, and leases for this exploration were canceled upon news of the oil flooding into the Gulf. This announcement, made on 27 May 2010, immediately sent ripples through Virginia's transportation industry, as money slated for rail and road projects depended upon revenue from oil exploration off that state's shoreline. Still, as an investor, you may question how much revenue a state might receive from exploration and whether other means of raising money might suffice to carry transportation improvements and maintenance.

Finally, I want you to know how difficult it is to write an unbiased article about investments in these arenas when I am writing about my daughter's birthplace and home, still, to her father's family. This close attachment to the Gulf area impels me to bring up the topic of investigating your investment possibility before you ever spend a dime on a company. Investment clubs often take field trips to check out an investment possibility. While this is a noteworthy tribute to delving deeper into a company's operations, I wonder how many individuals within that club take time to talk to managers or even employees privately to learn more about the inner workings of that company.

This is why media coverage and Internet information is important for investment research, but not as important as taking the time and – yes – possibly spending money to investigate your investment possibilities in person if you plan for a long-term investment. Day traders invest on speculation. A long-term investor invests in products and services that mean something to that investor. At this point, however, even low-risk investments, or investments that may tout a sure return may change over time.

In other words, when it comes to investments now, it may be that volatility is the norm across the board until the full extent of the Gulf damage is realized. At the same time, you may argue that oil production is a necessity, and that if it doesn't take place here, it will take place elsewhere. Once again, determine how deeply you need to investigate this issue for your answer. When you read stories about how oil is drilled elsewhere, you may realize that the only mistake that occurred this time around is that oil was spilled on America's shoreline.

Until Later,
Linda Goin


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