Working as financial advisors in Calgary, Alberta over the years we have observed what we believe to be a pervasive problem in our province. Many households are not adequately diversified. Why do we say this? Many couples we meet invest in and derive their household income from Oil and Gas. While the Oil and Gas sector has always been a great employer in our province it also needs to be addressed as a risk as part of your financial plan.
In many cases individuals have 30% to 60% of their invested assets tied up with their employer’s stock due to stock options and other long term incentive plans that the companies offer. To worsen the problem, many households likely also hold a sizeable basket of other Oil and Gas investments in their self directed or broker accounts. It is easy to see how quickly one’s entire financial future can be significantly exposed to one sector.
This blog post is not about being anti Oil and Gas and is more about taking a step back and asking the important questions about how you have positioned yourself now and going forward.
Married to your Company Stock
At the heart of the problem is the emotions tied to investing. Many employees feel attached to their employer’s plan and become complacent and feel a sense of loyalty to their company, therefore, are reluctant to trim their holdings to a more reasonable level.
We always try to put things in perspective when these situations arise. If you contacted a financial advisor and said “I would like a second opinion on my $1,000,000 portfolio” and the advisor came to you with a plan to invest 30%-60% of your invested assets in a single stock, you would likely think the advisor is crazy and likely find someone else to work with. Unfortunately, individuals tend to fall into a trap of not being able to see the problem with this much clarity if it is their employer’s stock.
All to often when we are reviewing a client’s portfolios from their old advisor we find portfolios that are littered with small cap Oil and Gas stocks that although they trade on a stock exchange have very little liquidity. This concentration and focus on small cap Oil and Gas stocks is very risky. This is swinging for the fences and unfortunately caries excessive risk! Layered on top of these junior stocks is typically an energy focused portfolio that lacks exposure to more than three sectors / asset classes. Overconcentration in any asset class leads to greater volatility of your portfolio, and can pose significant risk in achieving your retirement goals. Sometimes investors forget that if a portfolio drops by 50% it needs to go up 100% to be back to where you started from.
Having significant exposure to Oil and Gas when it comes to your household’s employment as well as your financial assets creates a potentially deadly financial situation. In the event that one or both individuals lose a job you might also be forced to liquidate some of your non registered investments near the bottom of the cycle which will only compound the impact to your financial future. With an extended low commodity price environment this will likely impact the value of your home as well, thus spreading across all aspects of your financial future. Unfortunately, with this current low commodity price environment we are also finding our province and country being viewed as risky from a foreign investment standpoint. The fear we have with the current political environment in Canada, is how much of the much needed foreign investment we need has been scared away? When will it come back? Will it come back? With capital flowing globally is Alberta’s resource economy even on the radar of global opportunities that make sense?
Our solution is to build a foundation which we call the Core in highly diversified portfolios utilizing multiple managers packaged into one easy to manage offering. When appropriate we Explore alternative options in lower correlated investments such as real estate and private equity investments seeking above average potential returns relatively independent of the stock market volatility. Raintree calls this the Core + ExploreTM approach to investing. Of course, we cannot ignore your insured risks that need to be protected as well as sound estate planning, later blog topics.
We love the Oil & Gas industry and hope for a strong persistent recovery, but everything must be done in moderation when constructing your retirement nest egg.
Regardless, many Albertans are not as diversified as they may think, and maybe it is time to have a closer look.
Sean Wilson and Russ Hafer are securities licensed through Raintree Financial Solutions and offer insurance based solutions through Quarry Wealth Management.
#Diversification #Risk #Calgary #Alberta