Should You Be Bothered About BP's Share Price Tumbling?

ONCE AGAIN panic and hysteria is predominant in the financial media. BP's share price has fallen dramatically in recent weeks for obvious reasons (not helped by criticism of the company from the President of the country that gave us Union Carbide and Piper Alpha).

In mid-May BP shares were trading at around 547.6 pence each. At close of business on 11th June they are down to 365.5 pence - a fall of over 33%.

So, if you have a portfolio of concentrated shares including BP (or perhaps entirely in BP) then you may be feeling a little down at the moment. If you rely on the BP dividend to fund your lifestyle you will also be worried by the relentless media noise on how it may be cut or even suspended (or outlawed, as Obama has intimated). A drop in portfolio value and a drop in dividend - a double whammy for sure.

This is why investing in individual shares is so, so risky. Sure the potential gains are fabulous if you invest your wealth in a small basket of shares. If they go up sharply, you can make serious money. But - like the roulette wheel - putting all your chips on one number can also wipe out your fortune. Unless you view share investing as a bit of fun, to be played with pin money, you really are running a high risk trying to increase you wealth in this fashion.

So the message is to diversify. Spread your investments across a wide range of shares across a wide range of countries and differing economies. Include other asset classes that help diversify your investments into areas other than equities. Do all of this using low-cost, scientifically engineered passive funds that capture broad market returns without paying away a small fortune each and every year to a smooth talking, be-suited star fund manager who doesn't know you or your aspirations from Adam.

Of course, BP is a major PLC and, along with HSBC, is a dominant share listing in UK equity markets. Perhaps these passive funds are dominated by such big capitalisation stocks, so that even a diversified portfolio takes a hammering when their share prices fall so precipitously? Let's look at the figures...

We run a range of Model Portfolios for our clients, with the exposure to equities increasing by 20% in each case. For example, the Conservative Model Portfolio is 40% equity based, the Balanced Model Portfolio has 60% equity exposure and equities account for 80% in the Opportunity Model Portfolio.

So what is the total percentage exposure to BP in each of the above portfolios? The answers are 1.3%, 2.0% and 2.7% respectively.

In other words, if BP's share price fell by half (!), clients in our popular Balanced Model Portfolio would see a fall in the value of their investments of....... wait for it..... ONE percent.

You don't know which individual shares are going to do well (or not). Neither do we. We do know that - over time - capital markets can be expected to reward you for investing in them. The reward is out there, waiting for you, if you can afford to wait for it....

{The above is solely the opinion of Nick Lincoln. It is not individual financial advice and should never be taken as such. If you wish to discuss the issues raised in more detail, please make contact with Nick. If you ignore this small print and act on his opinion(s) without first seeking financial advice or reading at least 100 pages of Key Features Documents containing numerous risk warnings, you may well be struck down by lightning}