A reader asks:
I bought Exxon, Shell, and Devon Energy with my traditional brokerage account when oil was $0 a barrel. I’m sitting on some solid unrealized gains and feel like I need to rebalance my portfolio and lock in some gains. I wouldn’t even mind sitting on some dry powder for the market to pull back. I feel like we’re one news announcement away from oil crashing like a lead balloon. What’s the best way to set a jumping-off point amid geopolitical uncertainty? Or will oil rise even higher if China starts buying from our US companies? Am I chasing another 10-15% rise before a bigger decline? I’m 38 with a 4 and 6, I max out my SIMPLE IRA every year and have a 529 for the kids. My investing style has always been a long-term buy and hold, with added patience for the latest hot trend. I feel like I’m getting burned out of the market because of AI and the fact that I’m addicted to logging into my account every day just to see what’s going on.
This is very good timing for these purchases.
Both Exxon and Devon Energy are up over 300% since the end of April 2020:
Markets went crazy in the spring of 2020, but oil prices going negative is one of the most memorable moves. This wasn’t supposed to happen… at all?
Buying oil stocks in 2020 was a pretty contrarian trade.
As of March 2020, the return on energy stocks as a group was negative until 2005. This was fifteen years of lost time.
Since April 2020, the energy sector ETF (XLE) is up 280% while the S&P 500 has gained 180%.
These cycles of high performance and underperformance are normal for energy stocks this century:
The energy sector crushed the S&P 500 before the Great Financial Crisis. Then there were a few years when the S&P 500 and energy stocks were both in water.1 This was followed by a rise in the S&P and a decline in energy stocks. And finally, a return to energy from negative oil prices.
What happens next? How should you handle your big energy stock gains?
Whatever you decide, DO NOT base your investment decisions on geopolitics. That has to be the biggest takeaway for investors this year.
Everyone who followed the energy markets predicted that oil would reach $200 per barrel due to the war.
And I don’t blame them!
Considering what happened with the closure of the Strait of Hormuz, oil prices should do get higher. Markets often do not cooperate with forecasts.
Oil prices never even approached $200 per barrel:
We also played this game in 2022, when the Ukrainian war started:
Why are the estimates always $200 per barrel? People love round numbers.
Energy analysts have no idea what will happen to the price of oil. So am I. So are you. Don’t use geopolitics to make portfolio decisions. Even if you are right about supply and demand dynamics, you may be wrong about market outcomes.
My biggest advice here is that you need to simplify your portfolio or process.
You have two small children at home. You should not get tired of constantly checking your portfolio.
Also, trying to time the market will not help with financial burnout. It will make the situation worse!
Sitting on dry powder waiting for a pullback is just inviting more brain damage into the equation because you will constantly be checking the market to see when you need to bounce back.
The good news here is that you win by making well-timed stock trades. You can diversify now or later, but the most important thing here is that you need some kind of plan to guide your actions.
That’s the beauty of having a predetermined asset allocation that you can stick to, regardless of artificial intelligence, oil prices, geopolitics, or any of the other crazy things going on in the world.
Once you have your asset allocation done, you won’t have to rack your brains every time an investment decision is required.
What should you sell? No matter which asset class or position is above its target weight.
What should you buy? No matter what asset class or position it is, it is weak.
What should you invest the new money in? Your predetermined asset allocation weights.
I have no idea whether energy stocks have more room to move or if it’s time to pull back.
Whatever you decide to do, your investment process should not tire you that much. Constantly checking your portfolio every day is not the way to implement a long-term strategy.
Establish some reasonable investment criteria to guide your actions. Automate as much of it as humanly possible. Stop constantly checking your portfolio.
Then go spend time with your children.
Life is too short to constantly stress about the markets.
We answered this question in a brand new episode of Ask Compound:
Everyone’s favorite tax expert Bill Sweet joins the show to discuss questions about the Jeff Bezos tax plan, tax planning in retirement, retirement withdrawal strategies, early retirement planning, and how to create a dynasty 529 plan for your children.
Further Reading:
How Do High Oil Prices Affect Stock Market Returns?
1Both fell nearly 40% in 2008. XLE was released in late 1999. I’m sure if we had extended returns into the 1990s it would have been another cycle of underperformance.
