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A Slippery Dilemma
The Oil Spill Financial Fallout
Moments after news of the oil spill in the Gulf of Mexico reached the media, seasoned investors who understood its potential impact on world markets began trading oil stocks, drilling stocks, US treasury securities, and even commodities such as soy bean futures. For the less-seasoned investor, there are some specific lessons to be learned from this.
The tragic loss of lives, the uncertainty of how and when the flow can be stopped, and the concerns about environmental damage and cleanup costs have caused enormous anxiety. And because it will now be next to impossible for anyone to get permission to drill offshore anywhere from Alaska to Brazil, the oil exploration world has changed dramatically. All of this will likely have further impact on financial markets.
The Spill and the Investor
A disaster such as this can directly affect the average investor, you for example. Your financial advisor relies on the research department of the investment firm for advice on how and when to react, and by the time you receive this advice, it is already too late to avoid the immediate loss that may result from the market impact.
If the loss you suffered was unacceptable, you must also face the fact that another loss may be right around the corner. So, if you cannot take the heat, tell your advisor to get you out of the kitchen.
Risk Tolerance is Key
It is the duty of a financial advisor to give you an investment policy statement that takes into account your risk tolerance, as well as the your financial goals. Risk tolerance will always be a key element in any investment plan that your advisor establishes to give you a reasonable chance of accomplishing your goals. If you decide to accept some risk, you must understand the relationship between the risks you face and the goals you set. Either accept the risk of another loss, or change your goals.
If you have already accomplished your goals, your advisor should warn you that any risk going forward may jeopardize this accomplishment. In other words, what you have done might be undone and your gains turned into losses. Should you adopt new goals just because you have accomplished your original ones? Or is it wiser to adjust your investment strategy once your established goals have been met, to avoid taking an unnecessary step backwards?
Better Safe than Sorry
Financial advisors can’t guarantee results. Unless you invest in a guaranteed product such as a GIC or a government bond, you must always expect some fluctuation in your investment returns. If your losses exceed your risk tolerance, either you misunderstood what you were promised, or your advisor disobeyed your instructions.
There are two principal lessons to be learned from the Gulf of Mexico oil spill:
- Market changes will occur in unforeseeable, and sometimes catastrophic, ways.
- The retail investor will be the last to know about, and to react to, the impact of those market changes.
The wise investor and the diligent financial advisor plan accordingly. To be safe and not sorry, insist that your financial plan takes your risk tolerance into account.
If you have suffered a financial loss because your advisor failed to clearly explain the risks of an investment, you should contact a lawyer to discuss your right to compensation. John Hollander & Harold Geller are lawyers who are experienced at assessing potential claims and seeking financial recovery on behalf of clients who have suffered losses as a result of the negligence of their advisors. To date, 90% of the claims we have pursued have been settled in favour of our clients. To see if we can help you, contact us for a free, no-obligation initial consultation.
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