How I Learned To Stop Worrying And Love The Collapse Of The Oil Market

Includes: OKE
by: Automathic


Diversify for safety and control risk.

Energy provides positive diversification benefits.

Take what the market gives you.

The downturn in oil prices has led to much discussion about investment implications, particularly within the Energy sector. As I write, 70% of Seeking Alpha's Top Articles are focused on the Energy sector. Possibilities discussed range from a temporary buying opportunity to a long term multi-year bear market in oil prices.

My personal portfolio has not been immune to the pressure on energy names. My holdings in ONEOK (OKS) have dropped more than 30% in a few short months. I'm here to tell you that I'm perfectly fine with that. The changing oil environment did lead me to reevaluate my holdings in the energy sector, but after doing so I affirmed that I'm comfortable with them.

For me, it all comes down to the reason I hold stocks within the Energy sector to begin with. I hold them as one component of what I feel is a reasonably balanced portfolio that meets my needs and risk tolerance. Overall, the Energy component of my portfolio is 13%, which is higher than the S&P 500 allocation of about 10%. I am overweight energy (including MLPs) because that sector tends to have a relatively low correlation to most portfolios, mine included. In other words, energy holdings should provide positive long-term portfolio diversification benefits by increasing risk-adjusted return.

As far as problems go, low oil prices seems to me to be amongst the better ones to have. Sure, there's risk of counterparty defaults creating financial disruption and risk of lower quality companies going out of business. But these risks seem nowhere near as dire as oil price spikes and the days when the sky was falling due to peak oil (does anyone remember those days?). History has shown that equities can perform quite well in an environment of moderately rising oil prices and most economists would agree that falling oil prices bode well for the overall economy. So it seems that for my portfolio, any scenario aside from $150+ barrels of oil places me in a position for overall long-term portfolio growth. Falling oil prices can certainly weigh upon the 13% of my portfolio dedicated to energy, but the other 87% should be just fine; with a substantial part disproportionally benefiting from low oil prices.

In a world where we're constantly bombarded by the latest news headline and crisis, it takes fortitude to keep the big picture in mind. Don't let the past six years lull you into a sense of what "normal" should look like. In a balanced portfolio, it is unusual for all of your holding to move up in lockstep for extended periods of time. In fact, if that is the case, chances are that your portfolio is not well diversified. Low correlation assets are something every investor should hold in their portfolio. By definition, they will and should underperform from time to time. The real risk is failing to properly diversify to begin with.

As with my energy holdings, I hold a small allocation to REITs for similar reasons: high dividend yield, low portfolio correlation and low beta. I don't stress over what interest rates or oil prices will do to these sectors. I hold them for their diversification benefits and am prepared to accept any and all changes in price that will come to them as market conditions ebb and flow. In my opinion, most investors would be well served to do the same.

Disclosure: The author is long OKS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.