As Warren Buffet has said, the stock market can be a great teacher. While the Gulf Oil spill is certainly a terrible environmental disaster, it also provides another vivid reminder of the risks of concentrating your portfolio in a few stocks or allowing one stock to become a huge portion of your wealth.
This story has been repeated many times in the past. Many well known names, that were considered safe, incur huge declines, sometimes in a day or two or within months, without any prior warning and certainly not predicted or knowable in advance.
Merck and the Vioxx legal issues (dropped almost 50% in very short time period)
British Petroleum (down almost 50% since the oil spill occurred)
General Electric lost 88% from its peak in 2008 to early 2009
United Health Group, which lost 40% during 2006 due to corporate options issues
The key is to structure your portfolio so it can withstand an event such as the BP oil spill. By owning a broadly diversified global portfolio, your lifestyle will not be dramatically affected by the events (or failure) of one company or one industry.
Isn’t that the goal anyway? To reach a level of financial comfort, by saving and investing, so that you can enjoy your life, regardless of the success or failure of one or a few companies in your portfolio. For our clients, that would be our goal!