In 2013, widow Karen Robinson invested the bulk of her savings in the U.S. shale oil revolution.
Today, over half of her $202,000 investment is gone…
The Associated Press reports Karen invested in the oil boom through master limited partnerships (MLPs—often called “energy partnerships”).
[Energy partnerships have a special tax status under IRS code. They avoid corporate income tax as long as they distribute a set portion of their profits to their shareholders. These securities offer higher yields, averaging 6% in today’s 0%-interest-rate environment.]
Standard energy partnerships focus on safer oil-based income streams… things like storage tanks and pipelines. But with oil prices over $100 per barrel in mid-2014, advisers told Karen the “real money” was in drilling partnerships.
These were higher-risk companies, but they offered investors the highest income yields.
Today, oil trades for around $43 per barrel. It’s decimated the energy partnerships’ profits. And it’s annihilated investors’ funds…
Over the last year, investors have lost over $20 billion in publicly traded drilling partnerships. That amounts to $8 of every $10 invested.
Regular Daily readers know Karen broke three fundamental PBRG investment maxims by investing in the drilling partnerships:
- Never invest in anything you don’t understand.
Karen is a full-time high school teacher. Her late husband managed their finances. She wasn’t in a position to make sound investment decisions.
- Never focus on the upside. Focus on protecting your downside, and the upside will take care of itself.
Karen’s financial planner wowed her with lucrative stories from America’s shale oil “miracle.” He convinced her drilling partnerships were “the [only] way to go” for thick supplemental income streams.
- Never put all your investable funds into one single asset class.
Karen concentrated all her funds in one investment “location.” That’s like using all your money to buy a solid gold statue and then leaving it out on the front lawn. It’s just too easy for it to disappear.
Make sure you’re not repeating Karen’s investment mistakes… or your wealth will suffer a similar fate.
If you haven’t done so already, read our risk-management protocol—the Palm Beach Three-Legged Stool of Safety—right now. Then, dig into the “nitty-gritty” of risk management by reading the PBRG 2015 Asset Allocation Guide.