investing

Oil spill puts stock investor at crossroads

Don TaylorQuestionDear Dr. Don,
Unbelievably, I bought BP (British Petroleum) stock the week before the company had the disastrous oil rig explosion and spill in the Gulf of Mexico.

I have approximately $60,000 invested in stock. The stock position as of April 27 is down approximately $3,700. Should I sell the stock or hold on to it and hope things go back to normal? It pays a 7 percent dividend.
-- Richard Rout

AnswerDear Richard,
A former business acquaintance of mine told me how he invested heavily in Penn Central Railroad in the days before it declared bankruptcy. Event risk can blindside an investor and cause a precipitous drop in his wealth.

Diversifying your assets among asset classes can reduce the risk. You didn't say what portion of your wealth is represented by your investment in British Petroleum stock, but if it is a substantial percentage, then it's easy to make a recommendation to reduce your holdings.

The dividend yield on a stock is somewhat of a perverse statistic. The dividend yield goes up as the price of the stock goes down. As I write this reply, BP stock is trading at $48.23 and its dividend yield is about 7 percent. If the stock price goes down too far, a firm will sometimes consider reducing the dividend payment -- reducing the yield.

If you think the selloff is overdone, you could consider an option strategy where you buy put options as an insurance policy against future declines. You should work with your investment professional if you decide to trade derivative securities on this position.

Comparisons between this spill and the Exxon Valdez spill are problematic because of the increased flow of information, or headline risk, in today's marketplace. Allocating responsibility for the spill, determining insurance coverage and estimating the legal exposure for future settlements isn't an easy exercise. You'll see continued volatility in the stock for some time.

I like to say that you learn something about yourself and the markets every time you place a trade. Your lesson was a particularly hard one, but if it helps you to make better investment decisions in the future, you may look back on this as a net positive for your portfolio.

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