Laurie Flynn is a Financial Advisor with Smith Barney and is a supporter of Queercents. She’s written a few posts these past weeks on the topic of investing. These are her words…

Strategies to Help Cope with Higher Oil Prices

SmithBarneyWith oil prices up sharply during the past few years, many investors are worried about the effects of higher fuel prices on the value of their investments. Some have even asked if now is a good time to avoid stocks due to the surge in oil prices.

High prices at the pump”and the headlines that often accompany them”shouldn’t prompt you to make big changes to your long-term investment strategy.

It’s true that rising oil prices can contribute to a slowdown in the economy that sends stock prices lower. But those negative results may not be inevitable. Examining the 10 largest average monthly oil price increases from 1970 through July 2005 the Consulting Group found that the relationship between oil prices and stock prices is somewhat unpredictable from year to year. For example, in January 1974″the first year of the Arab oil embargo”oil prices soared nearly 135%. However, the S&P 500 fell a mere 1%. Then, in 1986, oil and stock prices moved in lockstep, rising 30.4% and 7.1%, respectively. In fact, stocks gained ground during 60% of the time oil prices rose.** (Source: Standard & Poor’s, Federal Reserve Bank of St. Louis).

The upshot: If you cash out of stocks during periods when oil prices rise, you could miss out on opportunities to help grow your wealth faster and achieve your most important financial goals.

The Real Price of Gas

It’s very likely that high gas prices during the past year or two have left you with less money to spend elsewhere”and that goes double for you SUV owners. What’s more, because consumer spending accounts for two-thirds of U.S. Gross Domestic Product (GDP) growth, a weak consumer can go a long way toward dampening corporate profits and pulling the economy toward recession.

But gas prices in the recent environment have not been prohibitively high. True, it might seem that way when you fill up your tank. However, gas prices are reported in nominal dollars”which can make current prices seem steeper and scarier than they really are. Example: The average price of gas in nominal dollars in 2004 was $1.92. But when factoring inflation into the equation, the price was $1.78. That’s 51 cents less than the $2.29 consumers paid for gas in real, inflation-adjusted terms back in 1981. Likewise, the real price of a barrel of oil back in July 2005 was $11.75, even though the nominal price was more than $60. (Source: Bureau of Labor Statistics, Federal Reserve Bank of St Louis)

In fact, when taking inflation into account, oil prices would have to hit approximately $90 per barrel”well above the current price”to match their previous highs back in 1980.

Not the ’70s All Over Again

If you lived through the 1970s, you no doubt remember sky-high oil prices, gas rationing and the resulting recession. The good news: The current environment is significantly different than it was back then. For one thing, the U.S. has actually reduced its oil consumption thanks to new technologies and conservation efforts. Oil consumption as a percentage of GDP recently stood at 4.1%, down from 8.5% in the early 1980s, according to the Department of Energy.

Another key difference: Inflation today is extremely low by historical standards and nowhere near the double-digit levels that we experienced during the 1970s. That’s helped the economy weather the recent surge in energy prices with relatively little negative impact”which, in turn, has benefited the financial markets. In other words, we’re not reliving the ’70s.

Given the current environment for oil and gas prices, you may want to consider these ideas:

  • Stay fully invested. While there most likely is a relationship between oil prices and stock prices, it’s not always clear how they’ll interact. Fleeing stocks because oil prices are high and/or rising is essentially a dangerous game of market timing”and it may cost you in the long run.
  • Stay diversified. Because it’s not always certain which types of investments will perform best during periods when oil prices rise, it’s prudent to build and maintain a well-diversified portfolio that offers exposure to the full range of asset classes”including large- and small-company stocks, fixed-income securities and cash. Such a portfolio may help position you to ride out oil price fluctuations and the financial market’s ups and downs.
  • Stay focused. Don’t let media headlines or any short-term event”such as a spike in oil prices during a particular week or month”cause you to abandon your long-term investment strategy.
  • Be opportunistic. Continuing focusing on sectors that provide opportunities that are in line with your investment objective. That said, you might want to limit the percentage of your total assets that you allocate to any one segment of the market in order to remain diversified and potentially reduce risk.

**Past performance is not a guarantee of future results.

———-
Laurie Flynn is a Financial Advisor with Smith Barney located in Toms River, NJ and may be reached at (732) 914-2315 OR (800) 624-0292 Ext. 2315.

Website: www.fa.smithbarney.com/laurie_flynn

Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.