Tempted by Oil's Surge, Investors May Overlook the Downside
Sunday, May 4, 2008
NEW YORK -- Many investors like to buy what they know. Eat a lot of fast food, the logic goes, and buy McDonald's. Know a local department store well? Snap up shares of Macy's. It's trickier, though, when it comes to surging energy prices.
Trying to profit from soaring oil and gas prices can be tempting, but it's not without its pitfalls these days, with some observers blaming speculators for the stream of records set in these markets this year.
Investors who want a piece of the action could invest in stocks of big oil companies, and many already do through pensions and 401(k) plans. But more daring players might wade into the often frothy waters of the commodities markets themselves, investing in products that tap into futures contracts for crude oil, refined products and natural gas.
Bill Gerlach, portfolio manager for the Nationwide Natural Resources Fund, said that while he doesn't make recommendations on how people invest, he understands the inclination to seek some benefit from the higher costs of filling a gas tank.
"We are consumers, so it would make sense to actually own some personally," he said.
But he cautions that the pullbacks in the volatile energy markets can be punishing.
"This has been the best energy market of my lifetime, and yet we have a correction basically every quarter and a half," Gerlach said. "Since 2004, we've had at least two corrections a year. I'm not talking small corrections. I'm talking 15 percent corrections."
Even with soaring prices, some investments in the sector have come off their highs. In the quarter ended March 31, natural resources funds, which often include investments in the energy sector, had an average return of negative 4.53 percent, according to Lipper, a fund tracker.
"A lot of individual investors are interested in whatever has done well recently," said David Kelly, chief market strategist at J.P. Morgan Funds. But, he said, there is "some dangerous investment interest from the perspective of an individual investor in chasing these oil prices."
Investors need to decide whether they are comfortable with delving into a market that has had such rapid gains.
"I've been getting quite a few questions from people wondering why the market is so dominated by speculation right now," Kelly said. "Instead of the actual users or producers of oil being the ones making the market, the market seems to be dominated by this sort of Vegas-type mentality.
"This is not just a game. There are a lot of people getting hurt by it," he said, referring the effects of higher prices on many consumers.