The Rebalancing Act

What happened this week?

For the week ending on Friday January 9, 2015 the Dow (DJIA) closed at 17,737.37 (-0.95%), the NASDAQ closed at 4,704.07 (-0.68%), and the S&P 500 closed at 2,044.81 (-0.84%).

As is typical, the stock market was up and down with tons of speculation. One of the main highlights was the continuing drop in oil prices. A barrel of oil ended the week at approximately $50 a barrel, after starting the week at $54/barrel. Not too big of a drop, but when you consider that a barrel of oil cost $110 only six months ago, that translates to a 55% drop in six months! Now that is a big drop.

What does any of it mean?

Besides enjoying the lower price of gas (I drive a diesel car and paid under $3/gallon!), how else does the declining price of oil matter to you? The big question is why are oil prices dropping? Is it because of a surge in supply, or is it a decline in demand? The answer matters. A decline in prices due to a surge in supply is great. We all enjoy the lower gas prices, industries incur lower fuel costs, which may translate into lower prices of goods and services to consumers, you and me. It is definitely something to cheer about. On the other hand, if the decline in oil prices is due to a decline in demand, there is reason to worry. Economies around the world, including the U.S., may be slowing down, leading to lower production and lower fuel consumption.

While it is fairly obvious that declining oil prices affect energy stocks (oil companies like Mobil, and oil services companies like Schlumberger), what may not be as obvious is that there is a ripple effect through the stock market that may affect other stocks. Companies affected by the lower oil prices have suppliers and business partners that may not get as much business, and they in turn may not give their suppliers as much business, and so on …..

What should you do?

Other than enjoying the lower gas prices, you have no control over what is going on with oil prices. One action that you can take is to review and rebalance your portfolio. Many of us start contributing to a 401(k) or other investment account and we “set it and forget it!” A better strategy is to rebalance your portfolio annually, or when one of your investments has had a strong performance, which is likely to throw your portfolio out of whack.

Your risk profile will help you determine the right mix of investments and will help you identify the need to rebalance. Visit my website http://www.thefiwoman.com/ for various calculators, including a link to a quick, easy risk profile questionnaire by Vanguard Investments.

Haven’t started investing yet? Start by contributing to your retirement plan at work, or open an IRA (Investment Retirement Account) with an online brokerage firm like ShareBuilder. Read my book Fifty Shades of Green to increase your investment knowledge.

See you next week. I challenge you to learn one new thing about investing this week.

 

 

Ramat Oyetunji
Passionate about achieving financial independence and eager to help others on their journey to financial independence.

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