Even in a bull market, individual classes or sectors can still take a beating - and crush your portfolio if your account isn’t diversified. Last year, this was the case with energy securities and gas and oil equipment companies. While in 2014 the S&P 500 closed up 11.39%, or 13.68% if you allow for dividends reinvested, energy stocks and bonds and oil and gas equipment companies (often called MLPs) plunged around 30% in the 3rd and 4th quarters.
Energy Sector Attracted Investors Looking for Heat
For a few years, energy and gas and oil securities offered a tremendous return on investment thanks to high crude oil prices and increased energy production in the US, largely due to fracking. Not surprisingly, brokers and investors looking for market heat were drawn to these stocks and bonds in large numbers. Inevitably, some investors’ portfolios became overconcentrated in energy stocks and bonds. Meanwhile, the strong performance of the energy sector belied the high risks associated with these securities.
Then early last summer, energy started to falter. By the fall, it was crashing.
The catalyst for this plunge was high crude oil prices. Starting in June 2014, within five months oil prices fell 38%, and they dragged the whole energy sector down with them, along with many unfortunate investors who were overconcentrated in energy stocks and bonds.
Oil Price Crash Lead to Massive Fallout Among Oil and Gas Companies
According to the Wall Street Journal, “The downturn has implications for energy companies’ bonds as well as their shares. A growing number of companies behind the bond bonanza are struggling to service the debt they took on now that oil sells for less than $70 a barrel. Credit-ratings firm Moody’s Investors Service on Nov. 25 changed its outlook on oil-and-gas producers to negative from positive, citing the likelihood of sustained weakness in oil prices.”
Four months later, crude oil has dropped far below that $70 a barrel to less than $50 a barrel. The fallout among oil, gas, and energy companies across the country has been apocalyptic. Hopefully that hasn’t been the case with your investment portfolio.
Was Your Portfolio Overconcentrated in Energy Securities?
Financial advisors are required to design a portfolio of investments that are suitable for you as an investor, in accordance with your life situation, investment objectives, and risk tolerance. Risky energy stocks and bonds are not for everyone, and they certainly shouldn’t form a large part of any but the riskiest type of investment portfolio. Another thing to keep in mind is that the nature of securities change as the markets change. Energy securities once regarded as moderate risk can shift into high or very high risk if the natural resources or benchmarks they’re tied to swing dramatically, as did crude oil prices last year. That means that those oil and gas company stock and bonds your broker recommended or purchased prior to this year may have become unsuitable for you as the oil boom went bust thanks to falling oil prices.
If you or anyone you know has lost money in your investment accounts due to energy stocks and bonds, please contact our securities attorneys immediately for a free consultation at 1-855-462-3330 or via email by clicking here.