With oil closing yesterday at an all time high of $137 per barrel, and gas prices over $4.00 at the pump, you might have asked yourself, "Shouldn't I be investing in oil companies?" The short answer is: Yes.
Everybody needs oil, there's nothing else like it, they're not making it any more (or at least Mother Nature isn't), and there's barely enough of it to go around. More to the point, your friends and colleagues are probably talking about it, while the guys on TV seem to think it's a great idea.
And I agree. Investing in oil companies is a good idea.
But you may have also asked yourself the question, "Shouldn't I take some of my extra money and just invest it in some oil, a hand full of oil stocks, or an oil-focused mutual fund?"
Let me assure you the answer to that question is"¦ No.
In the 90's, everybody thought technology was a great investment. After all, there was nothing else like it, everybody needed it, and people couldn't get enough of it. Same story with real estate: everybody's gotta have a place to live, and with land, there's a shrinking supply they're not making any more of it.
Of course, we saw what happened with both of these sectors of the economy. Boom. Bust.
In fact, the boom-bust cycle is an intrinsic part of most sectors of the economy, and that's why it's important to approach all sectors in a diversified manner.
When I recently surveyed the average account that is under our direct management (meaning an account that is held at a brokerage firm where we have both the power and the freedom to choose any security we need), we found that energy companies made up a total of 9% of the overall exposure to stocks, and more than 50% of the bonds in an average account were issued by companies or governments located in major oil producing countries.
So what's the bottom line? If you're probably already investing in oil (as well as natural gas, coal, and greener forms of energy production) so there's no need to drill deeper in this sector. It's already a meaningful yet reasonable part of your overall investment strategy.
Given the speculative fervor about oil, it might be the wiser choice to merely stay the course.