If you had a million $ of Exxon-Mobil stock would you trade some in on safer low yield bonds if so how much?

Question

Say an eccentric uncle gave you a million dollars in Exxon-Mobil on the condition you keep the money invested. Would you sell off the Exxon and invest in a spectrum of investment products including mutual funds and safe but low yield bonds or would you keep the high paying apparently stable Exxon (rhymes with Enron!!)

It seems that at least as long as President Cheney is in office the Exxon is almost a sure deal. If you wanted to split the difference what percentage would you move to safer investments ? 25%, 50% 80%?

Just so you know the quetion is purely theoretical and I am asking for a friend with great expectations.

Answer 1

Actually this question is very close to home for me as I stand to inherit a bunch of Exxon-Mobil. It is a large percent of my relatives' portfolio. They bought less than $3,000.00 of the stuff way way long ago, and they don't dervisify it because of a) despite it size the relative has more than enough income streams that they don't need to worry about it, b) 15% capital gains tax of a bunch is still a sizable hunk of dough. Considering their annual dividends are nearly more than they paid for it, they don't need to worry.

Now when I inherit it (well a quarter of it - darn siblings!) I will definately diversify what's left after estate taxes. I'd probably keep a portion there, because Rex Tillerson & staff simply run a great oil business. (They catch a lot of heat for not diversifying into alternative energy etc, but as they say, they're Texas Oil Men what do they know about Solar Power? Year before Exxon & Mobil merged Mobil bought Montgomery Ward Department stores to diversify, seen any MW stores lately? No, cuz what do oil men know about running a retail store.)

That said if your going to own individual stocks you should have at least 30-40 diversified holdings. (ExxonMobil, Chevon, ConocoPhillips would not be diversified). Why, to spread out your risk... (A concept I've been working on another relative on who's heavy into the oil drillers.. and we don't even live in Texas!) any number of things can affect the prospects of a company, some are company specific, some are industry specific, some are economy specific. By diversifying by industry, size, and style (Value as opposed to Growth) you minimize the amount of risk you take without drastically changing your expected returns. (Expected returns can be a tricky concept, but think of all the probabilities for an annual return on a company from the tiny percent chance it goes bankrupt to the tiny percent chance it jumps some monsterous percent, the mean result is your expected return). Portfolio theory research has shown you cover most of these risk reducing benefits through the 30th significantly different investment.

When you buy a mutual fund you are having the manager diversify for you (most managed funds cover one part of the possiblities (ie Large Cap Growth, Small Cap Growth, Mid Cap Value etc.)

Should you have safer bond (I assume you mean Treasuries)? Depends on the investors' needs and willingness to accept risk. Sure you could invest in a low cost index fund and mimic the market's returns, but what if the market risk is higher than your comfortable with? You can substitute a portion of the equity holding for low risk bonds. What if your liquidity requirements are higher than the market allows? (By liquidity I refer to the ability to convert investments to cash in the shortest amount of time, with the least risk of having a loss on the principle.)

Some notes on Exxon that the general public doesn't get:

- Oil prices are skyrocketing because a) availiblity of cheap to extract oil in "civilized" regions is declining rapidly (supply is dropping), b) exploding economies in Brazil, Russia, India & China are pushing worldwide demand to new highs.

- The guys at Exxon know the oil business, and they've been selling marginal producing properties (which tells me they think the market is high, when oil was less than $20/barrel they were buying - buy low sell high - this is such an easy concept and still only the best managers do it, regardless of industry.) Also they consistantly are the best at replacing their proven reserves year in and year out (some companies have been drastically overpaying for oil properties to maintain their proven reserves.)

- ExxonMobil is the largest publically traded company in the world, with a $300 Billion plus market cap, and 2006 profits of over $40 Billion (Note to my charming and semi-communist governor, that was AFTER they paid $24 Billion in income taxes). Yet they rank about 10th world wide in the oil industry as they compete with Nationalized Oil Companies, Exxon is about on par with the Nationalized Oil Company of Norway.

- The guys at Exxon take care of your invested money, despite outside pressure they only take on projects that they expect to net a reasonable rate of return, and they minimize their business dealings in high risk regions. When they can't find enough projects that meet those critria they return capital through dividends and stock buybacks.


A note on stable companies, I once saw a list of the twenty safest blue chip companies (I won't mention whose list).

Enron was #1, Worldcom was #7... so ANYBODY can go horribly wrong...

Answer 2

Neither. Cheney is not President, and has no financial interest in Exxon-Mobil. I would diversify into other corporate stocks and also REITs, which have done well for me. SInce the principal is to remain invested, I would look for yield.