Deep thoughts on oil

[wildcat]

Ok this is not a which way is oil headed thread and besides nobody really knows. The thread is to discuss whether or not we should include in a portfolio. It is very clear to me at some point, say around $45 and up, the price of oil and the market began to move in opposite directions. Not all the time but a lot of the time. It is very clear to me that higher oil prices will drag some business sectors and drag some consumer spending. Both could have negative impact on the stock market as profits drive stock prices.

So with that said here are my thoughts and/or questions. We are all in search of low correl asset plays and investments. Does oil/energy have new spot in a portfolio because it fits the criteria? Or do we move to a new equilibrium for oil which in my mind would erase the benefits of holding it in a portfolio? In other words do we get used to paying more for oil and do businesses respond accordingly (raise long-term prices to fit the bill)? Crazy thing is at higher prices for most good people consume less but that is not the case with energy. We still consume as much (and on a world basis) if not more.

 

[maddythebeagle]

I have oil/energy in my portfolio, but I am thinking of just holding my investment and not adding or just dollar cost averaging a smaller amount.

 

[JPatrick]

Rather than trying to guess the next move in oil or wonder what a price of $X would mean, I'd simply look at the history of these stocks.  Check out the performance of these Fidelity sector funds: FSENX and/or FSESX. Both have track records of over 20 years which represents a whole lot of oil through the pipeline.  Assuming you are impressed with the record, then simply ask yourself what you think the future (beyond a few years) holds for this commodity.
Personally, I think the returns are going to continue to be good reading over time.
I must admit I am drifting more and more to ETF's with their easy tranactions and the ability to write options if desired, but the fidelity funds represent my long term core.

 

[P.S.]

JP, maddy, wildcat and other energy mavens...

if you wanted to add energy, what would you buy and why?

 

[JPatrick]

JP, maddy, wildcat and other energy mavens...

if you wanted to add energy, what would you buy and why?

I'd buy the funds noted above. Good etf's are XLE and OIH.
Vanguard has a fine energy fund that recently reopened, but it requires $25K to play. The Fidelity funds are $2500 and are priced every hour.

 

[wildcat]

PS-
I like the iShares global energy ETF, more diverse. US allocation is a tad under 50% and the rest includes some of the emerging economies energy stocks + euro's biggies like BP (read a lot about BP and it is a very well managed company)/Royal/Total. Exp ratio is .65 I believe. Vanguard's VIPER is cheaper but more US based.

To me oil is a global commodity, a global problem and therefore should be a global fund/ETF. Hate to exclude up and comers and other big oil, like BP, companies in other countries. You may see a few of the big ones in the VIPER but that is all.

JPatrick -
I have run some old numbers on the Vanguard Energy Fund against the S&P and I was pleasantly surprised with the fairly low correlation (less than 50% if I remember correctly). But it was since the fund's inception and excluded very long periods of time.

 

[maddythebeagle]

You can invest directly in several of the larger oil plays (exxon, bp, etc. and some smaller ones like energen) with no fees if you want to own in a taxable investment and interested in increasing dividends. I know a lot of folks here that dont like individual stocks but I have a mini mutual fund of direct investment plans and drips. Odds are the ETFs probably have a pretty large exposure to the bigger companies anyway. I dollar cost average exxon and they have outperformed the sp500 over time.

 

[Mountain_Mike]

I inherited some Chevron stock (CVX) and it has been doing quite well. I just reinvest the dividends and plan to let it keep growing.

 

[wildcat]

Odds are the ETFs probably have a pretty large exposure to the bigger companies anyway. I dollar cost average exxon and they have outperformed the sp500 over time.

The purpose behind an ETF is diversification. You may save $15-30 on a commission but you also only gain exposure to a couple of oil companies via DRIPS. To me it is worth it.