Tuesday, January 20, 2015

Crude Oil vs. TSX

While a recent spike in Crude Oil prices gives promise in the wake of a significant decline, it does not alleviate the turmoil amongst investors. In such a situation however, it is important to remain calm and to evaluate all of the surrounding factors within the market. It is the nature of the market to rise and fall, and as long as you remember the following, and manage your portfolio cautiously, there is no need to panic.
In light of recent drops, many people are under the impression it is an automatic statement of fact that Oil and the Stock Market move in lockstep. In the financial world we would call this a correlation of 1, meaning that both figures move in the same direction simultaneously. A Negative correlation would be -1, and would mean when stocks go up, commodity prices automatically move down. Interestingly, over time the TSX and Crude Oil have moved together, moved opposite of each other and had no relationship at all. (No relationship at all would be a correlation of 0). As shown in the charts below, the TSX on its own as well as Oil on its own, going back to 1977, have differed over time. This means that while there have been instances of reciprocity between Crude Oil and the TSX, such parallels are not always at play. In acknowledging this we must also acknowledge that there are many factors that can affect commodity prices, supply and demand being two of the most prominent. Eventually, over time, lower prices will likely self-correct and in turn we should not always forego volatile investments (the risk factor of the risk/reward mantra of investing). With this, we must maintain a neutral sentiment and watch closely for evolving industry trends, paying specific attention to all changes within the industry to ensure low impact on your portfolios.

 Summary: Should we be worried about the price of oil and the impact on our portfolio? 
While there are many factors to consider, some factors can be self-monitored to help ensure your collection of investments remain stable. At the current time, if you do the following, the answer is no, you should not hit the panic button. 
·        Follow a Pension Style of Investing (Investing over time)
·        Your personal situation has not recently changed
·        Maintain a well diversified portfolio
·        Try to avoid making emotional decisions
Want to chat further about this or your portfolio in particular, we are here and happy to discuss.

1 comment:

  1. Thanks for this useful advice. As a recent retiree, I did have some concerns.