A comment popped up on an old post on Seeking Alpha whereby a retired reader shared he had 40% of his portfolio in ten MLP and he was looking for feedback. I think this is a clear case of not really understanding the risk being taken. Vehicles that are generally high yielding and that generally have a predictable volatility profile make for a good hold—no doubt about it.
However, every so often the “safe and predictable” parts of the market do run into trouble, sometimes serious trouble. The point here is not to try to predict some sort of meltdown in the MLP space because the probability of such a thing is quite low but if it happens then the reader in question will get crushed.
An example I’ve used to make the point involves Amazon (AMZN). If you put 100% of your portfolio into AMZN in May 1997 at $1.50 and then sold it all in April 1999 at $105.00 you obviously would have had one of the greatest trades of all time but it also would have been a wildly risky trade. The word “wildly” would actually understate the risk taken. In this instance there would have been no negative consequence for the risk of putting everything in to AMZN but “no negative consequence” is not the same as not having taken the risk. Taking risk can work out fantastically well sometimes and sometimes not but people get into trouble for not realizing the risk they have taken.
The reader is taking a big risk with his retirement portfolio, this is undeniable. What we don’t know is whether he will ever have to face a negative consequence for taking that risk. Unfortunately this is a behavior that repeats over and over. With every scary event people find out the hard way they had too much exposure to the wrong part of the market.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
6 comments:
Roger, not as far out as the retired person you spoke of in your post; however, I started dabbling in the MLP space 2 1/2 years ago at what may be the buying opportunity of a lifetime. With share appreciation plus accumulations since, my MLP holdings are now about 12% of my portfolio. Love the dividends, though the share price does take a hit on days when interest rates rise (like bonds). As a general comment, what guidelines will you offer on how much is OK to overweight a sector one believes in? Thank you.
I would suggest to look yourself in the mirror to try to figure out what you'd do or not do or how you would react is there was something that happened along the lines of what happened to the Canadian trusts on Halloween 2006 when they changed the tax law on them. They got crushed. if some sort of unforeseeable thing happened that crushed the US space where would you be, what would that do to the portfolio, how would you react--these are questions to ask yourself to try to figure out whether it is too much or not.
Here's an interesting read from a recent Seeking Alpha article where the author feels MLP's are overbought and are due for a correction:
http://seekingalpha.com/article/251211-master-limited-partnerships-pipe-dreams-or-shark-jumpers
Yes, a risky trade that works out well does not make it any less risky trade; that's why risk-adjusted, total return is always worth tracking.
WRT MLPs, since this is an investment vehicle rather than a distinct industrial sector, any calculation of exposure risk should include sector suballocation; e.g., MLP's as 12% of a portfolio allocated among real estate, oil or gas extraction, pipeline transport, propane, coal, investments, barges and tugs, timber, or what have you would not have the same risk/reward profile as 12% in oil extraction or pipeline MLP's alone.
Sounds like MLPs are the new Gold for the chatboards.
Everything in moderation. As Harry Browne put it, the best laid investment plans collapse when you least expect it.
Reasonable diversification and multiple income streams? A better chance of success than rolling the dice on a "sure thing".
T
Post a Comment