What Does ‘Happiness at the Gas Pump’ Mean to Your Portfolio?
Who would have predicted that oil would be $50 a barrel in January of 2015? Global oil supplies have surged while demand has waned. A strengthening U.S. dollar, increasing concerns about an economic slowdown in Europe, growing North American and Russian oil production, increased output from recovering Middle East countries (like Iraq), and the deliberate price-cutting efforts of Saudi Arabia, have all conspired to bring oil to a five-year low.
Good News for Consumers: Gas prices have fallen correspondingly and significantly. The full economic benefit to American consumers and businesses has yet to be realized. Less cash outlay at the fuel pump means more funds for other purchases, as well as for paying down debt, and for saving. Of course, oil isn’t just used for gasoline, and many other areas of the economy will also benefit.
Bad News for (Some) Investors: While my 28-gallon SUV costs a lot less to fill up, not everyone is cheering the drop in fuel prices. Energy stocks, for example, have taken a beating. The energy titan, Exxon Mobil, has seen the price of its shares drop from $104 (July 28th, 2014), to $90 per share (January 6th, 2015). Companies in other economic sectors, however, are enjoying the lower energy costs, which translate into surging prices for their publicly-traded stocks. Two quick examples: Valspar (a coating and paint manufacturer that uses oil derivatives) traded at $78 a share on July 28th, 2014, and $84 on January 6th, 2015. Delta Air Lines has seen its shares soar (no pun intended) from $38 a share on July 28th to $47 on January 6th.
Winners, Losers, and Diversification: With the luxury of hindsight, it is easy to see that buying airline stock and selling energy stock in June of 2014 would have paid off nicely. However, the decline in oil prices was difficult to predict at the time. For investors who have never fully grasped why professional advisers fret so much over diversification, these recent events provide an excellent, although painful, lesson. Back in October, a local investor asked me for a second opinion on his portfolio. My analysis revealed that he had 40% of his retirement funds in energy stocks. If he had kept his energy-laden portfolio, he would have lost over $100,000 in just three months!
Power of the Second Opinion: Founding Father and third president, Thomas Jefferson, has been credited with saying, “Knowledge is power.” As we move into 2015, don’t let your portfolio or your financial future be blind-sided by unexpected economic changes and inadequate diversification. Jefferson also said, “Knowledge is safety,” and “Knowledge is happiness.” Now is a great time to harness that knowledge with a second opinion on your finances!