How Can You Invest in Oil Stocks to Offset Gasoline Prices?
The concept behind investing in oil stocks to offset gasoline prices is fairly simple. As mentioned, oil stock prices are related to gas prices. When gas prices go up, oil stocks often do too. When gas prices go down, oil stocks usually do as well. Thus, by investing in oil, you can offset any price changes that you see at the gas station. If oil/gas prices go up, you’ll have to pay more to fill your RV’s tank. However, your oil stock will likely be worth more as well. If oil/gas prices go down, your stock will probably be worth less than it was worth when you bought it. In this case, you’ll be saving more money on gasoline to offset this loss.
How Much to Invest In Oil Stocks
Because the purpose of this plan is to help ensure you can afford to go on trips in your RV, the amount you invest should be close to how much you intend to spend on fuel for your RV. At the extremes, this hedging strategy fails. Investing just $1 will do virtually nothing to offset rising gas prices, unless you only need enough fuel to move your RV from the front of your driveway to the back. Investing $1 billion is no longer a hedge against rising gas prices, but rather just a gamble on the oil industry. When determining what amount to invest in oil stocks, calculate how much you plan on spending on gasoline for your RV in the coming years. In theory, half of that could be put into oil stocks as a hedge, although you may want to invest more or less. Additionally, before you settle on a final amount, you should consider the possible pitfalls of this strategy (see below). Because there are risks involved, you should only invest disposable income that you would spend on gasoline.
The Potential Pitfalls of Hedging with Oil Stocks
Like all investment strategies, this one is not fool-proof. There are a few potential pitfalls that could reduce the effectiveness of your hedge. First and foremost, past performance is not a guarantee of future results. All investing involves some risk, and there is a potential to lose money. Second, the correlation between oil stock prices and gasoline is not simple or direct. There is often a delay between market movements and changes in gasoline prices, and shifts are not always equal to each other. The change in your oil stocks’ values might happen well before any change in gas prices, and the amount of change may not be the same. Third, gas prices are just one of many factors that affect oil stock values. A company’s performance, regulatory changes, and many other criteria can all impact how much a specific stock is worth. To lessen the impact of some of these criteria, you may want to invest in a mutual fund or index fund that broadly follows the oil industry, rather than a specific company’s stock. Even investing in a broad fund, though, won’t eliminate all of these other factors.
A Possible Way to Guard Against Rising Gasoline Prices
While not without potential risks, this strategy can help you manage rising fuel costs. For example, if you invested $1,000 in the Waddel & Reed Advisor Energy Fund three years ago, which is a mutual fund that heavily invests oil companies, you would now only have $894 in shares. Over that period of time, though, gas prices in Georgia have fallen by about 48 percent. Even if you own a fuel-efficient RV that gets 20 mpg, you’d save more than $106 at the pump if you drove at least 1,360 miles over that three-year span. This hedging strategy isn’t designed to pay for your retirement, but rather just to help offset some of the variance in your fuel costs. If you consider putting some money into mutual or index funds that invest in oil companies, you won’t need to worry as much when you go to fill up your RV’s fuel tank.