Even before Hurricane Katrina caused its almost incomprehensible damage to the Gulf Coast, most of us shuddered when we had to fill our cars’ gas tanks. With prices at $3 a gallon in some parts of the country, and crude oil hitting $70 per barrel, we were already in uncharted territory. Then, Katrina temporarily knocked out about 12 percent of U.S. refining capacity, along with a significant part of the Gulf’s natural gas and oil production. So, as a driver, you probably shouldn’t expect too much relief at the pump any time soon. But how about as an investor? Do you need to adjust your investment strategy in response to high oil prices?
It’s a difficult question. If oil prices and energy costs continue to remain high, it’s probably not good news for some areas of the financial markets. Although businesses are looking for ways to offset higher energy costs, they will eventually be forced to pass on these expenses to consumers or accept lower profit margins—either development could hurt stock prices.
On the other hand, some stocks or industries may actually benefit from high oil prices. You might hear that now is a good time to invest in energy companies. And it may be true that, in the coming months, some of these stocks will do well. But you need to be cautious about basing any investment decisions on short-term trends.
So, what can you do to avoid being buffeted by forces and events that you can’t control? Consider these suggestions:
- Diversify—The more diversified you are, the less susceptible your portfolio will be to rising oil prices, higher interest rates, political turmoil or other factors. I think there are some companies out there that are attractively priced that are in the construction industry. However, make sure that your entire portfolio doesn’t represent your industry. Spread your dollars among high-quality stocks, investment-grade bonds, Treasury bills and other securities.
- Know your risk tolerance—Contractors in general have a tendency to take on more risk. The bidding process itself is a huge risk at times. But if your investments are keeping you up at night, then you are taking on too much risk. On the other hand, if ultra-conservative vehicles, such as certificates of deposit, dominate your holdings, you may be limiting your needed growth potential. You may want to work with an investment professional to create a diversified portfolio that accurately reflects both your risk tolerance and your long-term goals.
- Look at the fundamentals—You’ll find it much easier to avoid being influenced by short-term events if you become familiar with the fundamentals of an investment. For example, if you’re considering a stock, you can take into account how it might be affected by rising energy prices, but don’t stop there. If you’re going to buy energy stocks, look at companies that have been around for 50 plus years and have had a history of increasing their dividends over the years. Is it a stable company? Does it seem to be priced fairly? Do its products or services have good long-term potential? Does it have a solid management team? And, perhaps most importantly, does it meet your specific investment needs? By digging deep into your reasons for investing in any security, you’ll position yourself to make smart decisions.
Focus on the future
Today, high energy prices, and their possible impact on the economy and the financial markets, are making big news. Next year—who knows? The fact is that there will always be reasons to shake up your investment strategies. But the smartest investors are the ones who find the course that’s right for them—and stick with it.