A Reminder That Markets Aren't Always as They Seem

Photo Source: Building.co.uk

Too frequently do investors get caught up in that one hot stock, bond, or other investment that the underlying fundamentals get quickly cast to the side.  Although many stocks are good buys, and many aren’t, the reason for investing can be clouded by outside influences.

A Story Retold

This phenomenon is best exemplified by recent news that the World Cup (yes the soccer World Cup), would have a huge impact on production of precious metals in South Africa.  Since the World Cup is to be held in South Africa and the event is sure to consume far more power than the infrastructure can possibly produce, frequent brown outs at platinum production facilities are expected.  Now, as wild as this may be, this is just one of the many externalities that investors will utilize to price stocks.

Plan for the Worst

Another recent happening is the immense and tragic oil spill by oil giant BP.  The firm, which controlled a drilling operation in the Gulf of Mexico that produced some 5,000 barrels per day, has now been sold off in mass.  Investors are weary that the spill could have a large impact on BP’s earnings as lawsuit after lawsuit wipes away its 2010 profit.  BP has since dove more than 30%, which is more than twice the decline of its rival Exxon Mobil.

Now, it would be absolutely impossible to foresee these catastrophic events, however, proper investing strategy implies being prepared for the infrequent.  Many pension programs, dividend funds, and other investment vehicles were heavily invested in BP for its huge dividends.  Now, some weeks later after reaching $60 a share, it is down in the mid-$40 per share region.

Reallocating Risk

After the last month, investors need to step back, take a look at what they own, and find the worst case scenario for each.  Though conventional wisdom has told us that buying different asset allocations creates enough diversification for our portfolios, the last year has told us differently.  From billion-dollar oil spills to financial catastrophes and limited electricity, the markets aren’t always what they seem.

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