Saturday, 20 December 2014

Drop In Oil and Diversification

Over the past few week the price of a barrel of oil has decreased by almost 50%. What does this have to do with my personal finances?

I currently hold five different stocks in my TFSA (Tax Free Savings Account), Canadian National Railway ($CNR), Canadian Natural Resources ($CNQ), Capital Power Corporation ($CPX), Cominar REIT ($CUF.UN), and Magna International ($MG). Three of these five stocks are strongly effected by the price of oil.

Canadian National Railway ships large quantities of bitumen crude from the oil sands in northern Alberta to refiners. Bitumen crude is significantly more expensive to extract and process when compared to sweet crude. Which means with a drop in the price of oil it quickly become unprofitable to extract bitumen crude, let alone ship it.

Canadian Natural Resources is a company that extracts oil and natural gas, 67% of its revenue from oil and 33% from natural gas. With the declining value of oil its not a secret that the company would reduce production from its now unprofitable wells.

Capital Power Corporation doesn't extract, ship, or process crude oil why was it negatively affected? Capital Power generates electricity, the fall of crude prices makes energy as a whole cheaper.

These three stocks made up approximately 60% of my portfolio. Fortunately when oil started its tumble the remainder of my portfolio was positively affected by the decline in oil prices. While I certainly need to remedy my energy sector overweight problem, diversification has protected me from significant losses.

Essentially this was a really long worded way for me to say don't keep all your eggs in the same basket - diversify your portfolio, learn from my mistake.

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