As you’ve no doubt noticed, your trips to the gas station have been a lot more pleasant these past several months. There’s not much doubt that lower oil prices have been welcome to you as a driver. But when oil is less expensive, is that good for you as an investor?
There’s no clear-cut answer. But consider the following effects of low oil prices:
Positive impact on economy — When you spend less at the gas pump, relative to recent years, what will you do with your savings? Like most people, you’ll probably spend most of it on goods and services. If you multiply the amount of your increased spending by the millions of others who are also saving money on gas, you can see that you and your fellow consumers are likely adding billions of dollars to the economy. Typically, a strong economy is also good for the financial markets — and for the people who invest in them.
Different results for different sectors — Different sectors within the financial markets may respond in different ways to low oil prices, even if the overall effect is generally positive. For example, businesses such as consumer goods companies and auto manufacturers may respond favourably to cheaper oil and gas. But the picture might be quite a bit different for energy companies.
You could spend a lot of time and effort trying to adjust your investment portfolio in response to low oil prices. In fact, you may well want to consult with your financial professional to determine which moves might make sense for your individual situation. Yet there’s actually a bigger lesson to be learned here. Don’t overreact to temporary developments. The recent decline in oil prices has certainly had an economic impact, but no one can predict how long these prices will stay low or what other factors may arise that would affect the financial markets. That’s why you can’t reconfigure your portfolio based on particular events, whatever they may be — oil price drops, interest-rate fluctuations, political squabbles at home, natural disasters in faraway lands, and so on.
If you can keep from being overly influenced by specific events, you may be able to gain at least two key benefits: First, by not making trades constantly in reaction to the headlines of the day, you can avoid piling up fees and commissions, which are costs that can reduce the return rate on your investments. Second, you’ll find that if you aren’t always thinking about what’s going on in the world today, you can focus your investment efforts more intensely on where you want to be tomorrow.
The most successful investors set long-term goals and don’t focus on factors they cannot control such as oil prices, interest-rate changes or other economic events. Instead, these investors make adjustments, as necessary, to accommodate changes in their goals as well as other changes, such as revisions in tax laws — but they basically stick to their same approach for the long-term.
So be aware of low oil prices, but don’t get so “pumped” about them that you disrupt your consistent investment strategy — because that strategy has the energy to keep you moving toward your important objectives.
Deborah Leahy is an Investment Advisor with Edward Jones Member Canadian Investor Protection Fund. firstname.lastname@example.org