HOW TO STOP GAS PRICES FROM KILLING YOUR WALLETCREATE YOUR OWN ENERGY HEDGE FUND
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Want to know how to stop gas prices from killing your wallet? Cheap gas prices in US service stations are long gone but there are ways to reduce the impact of high gas prices on your personal budget. One way, discussed here, can even help you profit from high gas prices. All businesses look for ways to reduce risk. One big risk for many businesses is the risk of large price increases in needed commodities. For example, many airlines operate industrial hedge funds that dampen the effects of fuel price increases. The Wikipedia Hedge Discussion states that, “Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity.” Airlines use a number of strategies that involve oil, energy, and energy related investments to keep ahead of fuel prices. Hedge funds can be very complex investments. But they don’t have to be. _________________________________________________________________
If you want a simple way to keep ahead of future gas price increases consider setting up a personal hedge fund. The hedge fund we’re going to suggest is the essence of simplicity and it works like this: 1. Estimate your annual gasoline expenses. 2. Invest a like amount, but no more, in an oil related industry like those discussed on the Conventional Energy Funds page. 3. If oil industry stock prices are above their two year average price, then you should consider purchasing the stock by Dollar Cost Averaging over a ten to twelve month period. 4. This is usually a ‘buy and hold’ type of strategy but, as with any investment, you should watch both the overall market and the energy sector for changes that could signal the need to make changes in this investment. In any event, your total risk is limited to the amount you spend on transportation fuel each year. That’s it. _________________________________________________________________
This type of investment can help protect you against future gas price increases. If gas prices go up, so do your returns from the oil companies. If gas prices go down you will probably continue to earn income from your oil company investments, but at a lower rate. It’s important to restrict the investment amount to your annual gasoline expenses. The purpose of this investment is solely to dampen the effects of gas price increases, no more. If you want to invest more in oil company stocks, that’s up to you, but don’t do it as part of your gas price hedge fund investment. Will the fluctuation in returns exactly match the fluctuation in gas and energy prices? The short answer is probably not. Your rate of return depends on a number of factors including the kind of investments you make. But because the returns are tied to gas prices, they will help compensate for future energy price increases. Some investments will pay more, some less; that’s the nature of stocks. Is there a chance of financial loss with this investment? Of course! Stocks are always a risk investment and if gas prices go down, the value of oil and energy related stocks will probably do the same. It’s unlikely that we’ll repeat the Great Depression of the 1930s, but it’s not impossible. It is also possible that high energy prices could lead to global recession, and a recession would cause investment losses in most financial sectors. On a more hopeful note, oil company stocks overall could also lose value if and when investments like those we discuss on the Alternative Energy Mutual Funds and Alternative Energy Start-Ups pages pay off. As new energy technologies come on line, demand for fuel oil will drop just as surely as the market for horses dropped as automobiles became more affordable. It is unlikely that that will happen in the next year or two. The conversion from horse transportation to automobile transportation took decades. But a couple of really big oil field finds will almost certainly push oil prices back down almost overnight, though in the opinion of most oil exploration experts it’s unlikely that it will happen. The point is that oil company investments, like all others, involve risk. But, as you consider investing in your own personal gas price hedge fund, remember that not investing also has risks. Which risk is preferable is entirely up to you. _________________________________________________________________ _________________________________________________________________
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