Written by Roger Wohlner on May 17, 2011 in Retirement  |   No comments

How Rising Oil and Gas Prices Might Affect Your Portfolio
Roger Wohlner

Anyone who drives a car is keenly aware of the swift rise in the price of gas. This is largely a result of political uncertainty in the Middle East. What impact will the increase in oil and gas have on your portfolio?

The answer varies. In some cases, you’ll see a direct positive impact on your portfolio. Here are some examples:

• Major oil companies, such as Exxon Mobil and Chevron, have seen impressive increases in the value of their shares over the past several months.
• This is likewise the case with funds and ETFs, such as iShares North American Natural Resources (ticker IGE), which have a significant allocation to energy-related stocks.

Here are some examples of a direct negative impact on your portfolio:

• The stocks of airlines, for which the cost of fuel is a major expense, will likely experience a negative impact, all else equal. This may be negated if they are able to increase pricing or find additional annoying little fees (like those for checked bags) to heap upon the flying public.
• Companies in the transportation business, such as trucking concerns and express delivery services like FedEx and UPS, will be negatively affected to the extent that they do not have sufficient pricing power to offset the increase in fuel costs.

Beyond such obvious positive and negative impacts, many companies (and perhaps the price of their shares) may see some change in an indirect way. Here are a few potential examples:

• Many online retailers have begun to offer free shipping to stimulate sales. If they continue this practice, their margins may suffer if shippers like FedEx and UPS are forced to raise their fees to cover increased fuel costs.
• Archer Daniels Midland could see its profits (and perhaps its stock price) positively affected if higher oil prices lead to increased demand for ethanol and other alternative fuels.
• Food companies will see their transportation costs increase, and their margins could suffer to the extent that they can’t increase prices to offset this.

For mutual fund and ETF investors who don’t own the shares of single companies directly, this is a good time to review the holdings of each fund to determine if rising fuel costs will affect them positively or negatively. In doing this, investors should keep in mind that mutual funds are required to report their holdings only at set intervals over the course of a year, so the information could be a bit dated, depending on the fund’s turnover of holdings.

Higher gas and oil prices could also have a negative impact on fixed-income investors. Higher fuel and energy prices have an inflationary impact upon the economy, both directly and indirectly, as discussed above. Higher inflation is the enemy of bond holders, in that it decreases the purchasing power of the fixed-interest payments they receive over the life of the bond. This is also the case for holders of bond funds and ETFs.

This article scratches the surface of how higher gas and oil prices could affect investors. Please add your thoughts in the comment section.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

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