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Should You Invest in Energy Stocks?

by Kevin Mercadante

Energy stocks are one of those investments sectors that people mostly ignore, at least most of the time. But when energy prices take off, as they have done several times in the past few decades, the regret of why didn’t I see it coming sinks in deep. When energy stocks take off, they really take off! That makes a strong case for holding at least some of your investment money in energy stocks.

There are times to be buying energy stocks and times to be selling them. Right now is looking a lot like one of those times to be buying.

Why energy stocks?

Should you invest in energy stocks

Will energy stocks charge your investment portfolio?

Energy stocks represent one of the most basic economic sectors in both the US and the world economies. The entire global economy runs on energy. Not only does that make energy a basic industry but it makes it a strategic one as well. If you are looking to build a truly balanced portfolio it would be hard to imagine having one without including an allocation in energy.

The energy sector includes oil and natural gas, nuclear power, and increasingly renewable sources such as wind and solar power.

There are times when energy seems more important than others, such as during times of supply disruption or a war that involves large energy producing nations. But that doesn’t mean that energy is not important when there isn’t some sort of turmoil in the world. Energy stocks are just about the best play on natural resources, and that’s something that every portfolio should have at least a little capital invested in at all times.

Why invest in energy now?

The best time to invest in energy is when energy is quiet

Right now energy doesn’t seem to be drawing too much media and investment attention. That’s the very best time to be investing in energy! Because the energy front is quiet, you’ll be able to buy energy stocks at much more reasonable prices than they will be should energy once again become “hot”.

The most fundamental investment strategy is to buy low and sell high. You can do exactly that – or at least the buy low part – when the news on a stock sector is quiet, like it is now. Once a major energy related story hits the media, energy stocks will begin to take off quickly.

Energy is one of those sectors that seems particularly prone to high volatility on the upside. This may be because there is considerable emotion attached to energy prices, which itself is because energy affects everyone.

The affect of economic growth and inflation on energy stocks

Though energy stocks usually perform best during periods of international turmoil, they also have solid long-term potential. Energy prices are affected by both economic growth and by inflation. Though neither situation may cause energy prices to rise quickly, both will cause higher prices over time.

Economic growth increases demand for energy. That puts upward pressure on energy prices and on energy stocks. The economy has been coming out of the recession slowly, but if that growth begins to accelerate energy demand will increase. As it does, prices will also increase driving energy stocks higher.

Inflation is more of a monetary phenomenon. While we think of it in terms of higher prices, the reality is that it means cheaper dollars. The world pays for oil in US dollars and if the US is devaluing the currency, oil exporters will demand higher prices for oil. When oil prices rise all things energy-related rise. Inflation can cause an increase in energy prices even if demand for energy isn’t increasing.

Will we see increases in economic growth and/or inflation? There’s no way to tell, but one of the best ways to be prepared for either is by investing in energy stocks.

Stocks or funds?

If you decide to invest in energy stocks should you do so by holding individual stocks or by investing in the related exchange traded funds (ETF’s) or mutual funds?

While energy seems like a simple concept, investing in it can be anything but. Energy stocks are a highly specialized investment sector that’s best left to the people who work closely in or with the industry. For most people, investing in energy through funds will be the better choice. You don’t have to worry about individual security selection or about building a balanced energy portfolio. Your only concern will be how much of your portfolio to allocate toward energy and when to sell when the time comes.

Since you probably work in an industry that isn’t at all related to energy it will be better to turn investing in it over to the energy professionals. That will free you to concentrate your efforts on the job and in the industry that you know best. You can follow your energy investments from the sidelines while leaving the more complicated details to people who know best.

In addition, it’s less expensive to invest in the fund than to try and build a portfolio of stocks on your own. And both buying and selling of your positions will be much easier.

Have you been thinking at all about investing in energy stocks lately?


Published or updated November 28, 2012.
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