Lessons From Oil Volatility

on Tuesday, 3 February 2015. Posted in , , , , , ,
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Oil has been in the headlines recently.  The price plunge of more than 50% since the summer has certainly been dramatic.  Surprised?  Yes perhaps the dramatic drop was unexpected.  Concerned?  Again perhaps you are, but you may want to take a step back before you start to panic with your portfolio.

oil

Just another cycle

Over the past 6 years we’ve seen oil prices reach as high as $140 a barrel and fall as low as $30 a barrel.  There have been 3 occasions where oil has fallen 50% or more and that happened in 2008, 2011, and 2014.  It only took oil about 6 months to start recovering in 2008 & 2011, and even though history tends to repeat itself no one really knows what oil will do over the coming months.  Either way for investors who hold oil it doesn’t answer the question of what should I do?  First instincts may be to cut losses and try to recover that in other areas, another idea is to buy more oil and reduce your average buying cost, where most no one likes the idea of not doing anything and simply waiting out the volatility.  You could however see it as an opportunity to buy big blue-chip companies with strong cash flow such as Exxon (XOM) or Conoco Phillips (COP) at a discount.  Both have diversified income streams including good margin businesses in refining and therefore their dividend yield of 3.15% and 4.65% respectively provide some protection.  If you think this is just another cycle, these yields could be attractive while you wait.

Bad Instincts – Be Patient

When something isn’t going the way we want it to the most primal instinct is to change it.  The idea of not doing anything can make us feel powerless and that’s not a comfortable feeling to have lingering on your mind. Unfortunately most people are so eager to change a bad situation they fail to ask whether the change could result in things getting worse.  The 2008 financial crisis was a prime example of this in that investors around the world tried to cut and stem losses.  Many sold out in late 2008 and early 2009 and parked their investments in cash, only to see the markets recover most their losses in 2009 whilst they watched from the sidelines.  This was a much worse position compared to those investors who were willing to ride out the volatility (or simply closed their eyes to financial news) and recouped most of their losses by the end of 2009 in not much more than a year.  That was hard to see then, and the future is always hard to forecast.

Don’t time the market.  Keep your strategy.

This is not to say that some people didn’t benefit from making changes, but a majority of the time people’s idea of changes rely on timing the markets, and timing the markets is not only highly risky but next to impossible to achieve on consistent basis.  So for those brave and confident to sell their oil holdings now with the idea to get back in when oil looks to rebound I wish you good luck.  To everyone else I ask is your portfolio diversified enough to endure the recent drop in oil prices?  If it is then you probably won’t be losing any sleep pondering all these questions, and if you can build on that diversification then you’ll likely sleep even better as you get older, taking comfort in that no matter what the economy or stock markets are doing you’ll have some assets in profits to use for your needs giving you the time, and more importantly the comfort, to wait for your other assets to recover.

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