By: Karen Riccio — October 8, 2021
How to Plug a Leaky Portfolio
It’s just plain ugly on all fronts.
When I heard last Sunday that authorities canceled the third day of the 2021 Pacific Airshow in Huntington Beach, CA... I knew something bad had happened.
Sure enough, it had...
My plans to watch the U.S. Navy Blue Angels, the Canadian Forces Snowbirds, and other aerial teams swoop and climb in the skies above the beach, changed abruptly.
An oil spill spreading from Huntington Beach to Newport Beach—along the shore and out to sea—halted all activities. My mind immediately shifted from excitement about what I was about to witness in the air to dread about what I would instead see on the ground.
I took the half-hour drive down Pacific Coast Highway (PCH) and saw so many helicopters I thought maybe a shark swallowed a surfer.
If you’ve never seen the immediate aftermath of an oil spill—up close and personal—count yourself lucky. It's a sad and messy sight.
(Click on any image to enlarge)
The Oily Aftermath
Sticky pitch-black clumps and globs... lifeless, oil-coated fish and birds... all had washed ashore. And the smell. That pungent, awful industrial smell displacing the fresh, sea-salty air.
I didn’t stay long, just enough to feel dispirited and depressed.
No one knows when cleanup will be completed, only that the ecological disruptions are massive.
As of today, the specific source and cause or a spill that sent 3,000 barrels of crude oozing into the Pacific are still being sought. It’s the biggest oil spill in California in 27 years.
The ultimate cost of “fixing” this man-made disaster—now the subject of a criminal investigation—are only wild guesses at this point.
But who will foot the bulk of the bill is as certain as the sun rising tomorrow morning.
Amplify Energy (AMPY), a Houston, TX-based company involved in the production of oil and natural gas in federal waters offshore Southern California, owns the pipeline that spewed all those gallons of oil. Divers discovered a 13-inch gash in it while investigating the cause.
An inherent risk in underwater drilling, this latest one certainly caught a lot of investors off guard. Shareholders of AMPY were basking in the glow of 338% year-to-date gains (through Oct. 1) just as oil prices were surging with the promise of more positivity on the horizon.
Then on Monday, the first trading day after the incident, news of the spill triggered a 46% selloff , and on very heavy volume.
Shares dropped another 16% through Wednesday.
How to Stay Safe
I don’t blame shareholders. I would’ve reacted the same way. Especially when you add potential negligence into the equation.
The company allegedly waited three hours before notifying the Coast Guard of the leak. And several class action lawsuits have been filed against the $122 million company for a potential breach of fiduciary duty.
As Amplify’s CEO said during a press conference, the company is insured against “most” of the direct costs of the accident (such as physical damages and business interruption). But remember, “most” doesn’t cover a lot of stuff.
If the accident proves to be due to negligence, that will result in severe consequences for Amplify—and investors who decided to go along for the ride.
Unlike Amplify, shareholders can’t buy actual insurance to pay for leaks in their portfolios. Here are three cautionary measures that will help you keep leaks small and risks low. That’s especially true when the market is already volatile and ripe for a selloff.
Put a Cap on Company Stock
While we can talk forever about how to profit in the stock market, it’s equally important to address how to prevent or minimize losses.
It’s possible that some employees of Amplify held shares—too many—in company stock in (or outside) their 401ks and suffered big losses. I’m a big believer that any more than a 10% allotment is a no-no.
Keep in mind, this doesn’t apply to insider buying by top executives who trade in large lots. I’m talking and looking out for YOU.
Isolated Black Swan events, like what Amplify is now a part of, in addition to bankruptcies, radical CEO changes, etc. can send a company’s stock into a freefall.
Don’t let it take your hard-earned retirement with it.
Instead of showing company loyalty by buying and hoarding its stock, do so by showing up on time every day and giving 110% effort.
Know Your Bear Market Math
Because we know that greed and fear are two prevalent emotions experienced by investors, the best way to neutralize both is to always have a plan for when you'll sell assets.
Just as you would pull out weeds from your garden, do the same with your portfolio positions. If a stock, ETF, or fund is deep in the red, don’t just ride it out and expect a miracle. That’s especially true if it puts a knot in your stomach every time you look at the ticker. That probably means you’ve hit or exceeded your tolerance for risk.
Even before you buy, determine what type of loss you can afford, or how much profit you’re willing to give back: Is it 10%, 20%, 30%, or nothing at all?
If you buy a share of stock at $100 a share and don’t want to lose more than 20%, pull the trigger, and sell when it sinks to $80. Don't procrastinate, and don't beat yourself up if the stock price surges the next day.
Believe me, it’s a whole lot easier to get over lost opportunity than lost principle, especially in severe selloffs or bear markets.
Since most investors do not spend a whole lot of time researching markets, you may be unaware of the precious time and earning power lost in down markets, time that only the very youngest investors can afford to waste.
Many believe it’s no big deal to gain 50% then lose it all (or more) because it takes them back to square one. Nothing gained, nothing lost, right?
That’s simply not the case. If you suffer a 50% loss on your portfolio, you’ll need 100% to bring it back where you started. For example, a 50% loss on $10,000 leaves you with $5,000. To get back to $10,000, you need 100% growth on that $5,000 just to break even.
The reverse is also true. If you attain 50% growth on $12,000, you’ll have $18,000. Yet a decline of just 30% (the average decline during a bear) will put you back to ground zero. Here’s why: One-third of $18,000 is $6,000. Subtract $6,000 from $18,000 and you’re back to your original $12,000.
That equation is referred to as bear market math—something you don’t want to become part of your investment vocabulary.
Reduce Risk With Cash, Low-Beta Funds
When you’ve reached that magic number, sell your position(s), and don’t rush to buy anything. You might want to park it in cash or the money market—every 401k plan must, by law, provide the equivalent of a safe, no-risk place to do that.
Investment guru Warren Buffet is quite fond of holding cash—he’s sitting on some $145 billion as we speak. He’s known for saying, “cash is like oxygen; everyone needs it and takes it for granted when it’s abundant; but in an emergency, it’s the only thing that matters.”
Or, if cash isn’t your preference, consider owning dividend-yielding or low-beta (meaning they’re less likely to move with the broader market) stocks. If you’re close to or in retirement and need an income stream, these are great tools, especially in climates like today’s.
(Data Sources: Morningstar and Hartford Fund)
To be sure, a healthy dividend check is no guarantee that the share price won't stagnate, but dividend-paying companies are less volatile than their no-dividend-paying counterparts.
One of the best ways to capitalize is with ETFs. Three of the top dividend-producing ETFs today are Global X SuperDividend ETF (SDIV), 6.83% yield, +5.5% year-to-date; iShares Emerging Markets Dividend ETF (DVYE), 6.42% yield, +7.8% year-to-date, and Global X SuperDividend U.S. ETF (DIV), 5.80% yield, +20.8% year-to-date.
You can also consider inverse index ETFs, which rise as indices fall and visa-versa. I’ll tackle those funds another day.
You can’t anticipate everything that might move specific stocks or entire markets. However, you can control the amount of risk your portfolio is exposed to by eliminating emotions and choosing positions that suit your needs—on the up and downside.
Stay safe (and Go Bills)!
Guest Editor, True Market Insiders