Investing in Oil

I am a big advocate of investing at least half of your money in a permanent portfolio (or something similar), as described by Harry Browne in his book Fail-Safe Investing .  I gave my recommended investment overview for 2013.

For the more speculative portion of your investments, I am not against the idea of investing in oil and energy in general.  I don't really recommend futures or options, unless you really know what you are doing.  Even then, I would stay away from futures and do only options that have a long time frame with money you are willing to lose.

I think the best bet is to buy oil and energy stocks.  Most of my investment advice does not revolve around individual stocks though.  If you want to buy individual stocks, I would stick with big companies like BHP Billiton (symbol: BHP).  Even with that, I would spread my eggs around and buy a few different companies.

I think an easier and perhaps less risky way to play it is by buying a mutual fund.  Fidelity offers its Fidelity Select Energy Service fund.  The symbol is FSESX.  While it is not a pure oil play, it does encompass the energy sector, which certainly includes oil to a large degree.  While your returns may not be quite as high with a mutual fund, it also takes some risk out of it by not being in any one particular company.

The direction of energy stocks is probably going to depend on the overall economy.  If we go into a deep recession, then energy stocks will do poorly.  If we see an artificial boom caused by the Fed's loose monetary policies, then energy stocks will likely do quite well.

Even if you are a big gambler, I wouldn't put more than 10% of your investments into the energy sector (aside from the small portion that may be in index funds in your permanent portfolio).  For most people, I would keep it at under 5%.

There are a lot of reasons that energy stocks could do well in the near future.  Aside from the depreciating dollar, there is constant chaos going on in the Middle East and other oil producing countries.  If any kind of a significant war were to break out, then oil could go up in price very quickly.

With that said, just remember the risk.  The economy is showing a lot of weakness and we still haven't seen big price inflation yet, despite the big monetary inflation coming out of the Fed.  So for now, concentrate more on wealth preservation than hitting a home run with your investments.