The Rewards of Energy Investing
If you acknowledge and mitigate the risks, energy investing can be very rewarding on multiple levels. Profits are typically the prime motivator, of course, but putting your dollars into energy markets can bring other rewards.
Reaping above-average returns
Because of the constantly rising demand for energy and the criticality of increasing supply, energy investments typically outperform the broader market.
For example, the Energy Select Sector SPDR fund, one of the most-traded energy funds, had a ten-year annualized return of 15.3 percent as of the beginning of 2013. By contrast, both the Dow Jones Industrial Average and the S&P 500 had annualized returns of less than 9 percent during that period.
That fund largely holds oil companies. Other energy sectors haven’t fared as well on a long-term basis, but the more you know about energy, and the more sophisticated techniques you employ, the easier it is to beat the market.
You don’t have to be long. The nuclear, coal, and renewable industries have all underperformed the market over the past few years. But if you’re in tune with the energy markets, you can go short and still outperform. If you had shorted the nuclear industry the day of the Fukushima accident in March 2011, for example, you’d have outperformed the market twice over for the following year.
Similarly, knowing when to sell can also lead to higher returns than the broad market. Many clean tech companies were up hundreds to thousands of percentage points between 2006 and 2008. Investing in them and taking profits while the industry was hot would’ve left you significantly ahead of any broad index. As with most investments, higher risk means higher potential reward. And knowing when to sell is key.
Serving a purpose
Dabbling in energy can offer other benefits beyond investment returns.
Tracking and finding ways to reduce your personal energy, both at home and on the road, not only improves your overall bottom line but also offers contributions to society, like reducing energy demand. If you reduce the amount you spend on energy, you’ll also have more free capital to inject in other aspects of the economy.
Investing in energy also allows you to participate in and contribute to what you believe in. Contributing personal funds to any sector or company is the ultimate way to put your money where your mouth is.
And this doesn’t have to be in the stock or commodities markets. You can become a member of an electricity co-op or fund a growing number of private energy projects whose objectives align with your beliefs.
A common saying is that the market knows everything. And when you have skin in the game, you become a piece of that market. Where you place your dollars plays a role in the direction of the all-knowing market.
Getting an education
Researching and investing in the energy market also gives you a hands-on education. You become aware of how the market operates because you’re a part of it. You notice fluctuations in energy prices and also why they’re fluctuating.
You start to understand the motivations behind how and why companies and governments do certain things. Because they affect the value of your investments, you’ll become more concerned with policy and politics, allowing you to become a more informed citizen.
Most important, you’ll eliminate surprises because you’re ahead of the curve. You’ll see a coming spike in oil or gas prices before it happens. You’ll see a bubble bursting while it’s forming. This foresight allows you to profit from world events and market swings that others are simply talking about in retrospect.