The US government predicts average gas prices could dip below $3 per gallon in 2015 (the lowest they've been since 2010), according to recent reports. This is great news for motorists, but what does it mean for you as an investor?
Gas prices play a significant role in both the national and global economy. They're both an indication of current economic strength and a predictor of how things may go in the future.
But like any commodity, gasoline prices create a complex web of consequences. Higher gas prices mean that manufacturing and delivery is more expensive thus potentially dampening consumer spending. But lower gas prices could be an indicator of a shaky global economy or a weak U.S. dollar.
When you see gasoline drop below $3 per gallon, should you be gleeful or worried? More importantly, how should you, as an individual investor, respond?
Let's take a look at some of the things we can learn from the upcoming dip in gas prices, and how you should handle your investment portfolio as a result.
The Benefits and Drawbacks to Lower Gas Prices
Low gas prices can help boost the U.S. economy since it makes the overall cost of goods cheaper. Companies can both manufacture and ship their goods with less overhead, and those cost savings get passed down to consumers giving consumers more money in their pockets to spend on additional goods.
Additional consumer spending fuels investment and job creation, which leads to even higher consumer spending, thus locking into a positive cycle that can fuel growth and strengthen the economy.
Yet while low gas prices are great for consumers, they also present some not-so-great indicators about a global economy already under stress.
For one, lower prices are an indication that emerging markets like China and India may be struggling. More than half of the worldwide demand for oil comes from these emerging markets, so reduced demand may mean that two of the largest economies in the world are slowing the pace of their growth, and that more oil is being produced than they are currently willing (or able) to pay for.
An economic slowdown in emerging markets, particularly the BRIC markets (Brazil, Russia, India, China), may carry its own reverberations into the U.S. economy, as many multinational companies rely on worldwide sales to boost revenues and fuel expansion.
Furthermore, the American oil industry could also suffer, as oil companies slow down production to reduce their own costs. This could negatively impact jobs in the U.S.
This potential snowball effect is worth consideration.
In addition, there's a concern that more money in Americans' pockets may not necessarily help the economy. If consumers fail to feed their extra cash back into retail purchases choosing instead pay off their mortgages or credit card balances the added cash-in-hand won't result in an economic boost here at home.
Remember the Economic Stimulus Act of 2008? Lawmakers decided to rebate approximately $152 billion back to taxpayers, in hopes that this money would funnel into consumer spending, which would dampen the effects of the recession. While some studies indicated a boost in discretionary spending, others noted that many families used this to make mortgage payments or meet other debt obligations.
Finally, if consumers fall into the "lifestyle inflation trap" and get used to a higher standard of living with low gas prices, the bubble could burst if and when gasoline prices swing back up again. In other words, lower gas prices may signal volatility rather than a boost to the economy.
Your Response to Lower Gas Prices
But don't necessarily make any drastic changes to your investment portfolio just yet.
Your portfolio should be prepared to weather market ups and downs. It's best to take a long-term approach to your investment strategy. Look at the overall historical performance of your stocks, bonds and other assets, and create a plan based on your age, risk tolerance and personal goals.
That's not to say you shouldn't regularly review your portfolio to make sure it's still in line with these considerations. But you need to guard yourself from a day-trading mentality that provokes otherwise rational investors to make hasty decisions based on emotions, short-term market fluctuations, and scary news stories.
It's hard to predict the future. The economy is affected by everything ranging from wars to weather patterns, from gas prices to general elections. Don't try to figure out what might happen next. Instead, ensure your portfolio is properly diversified, so that you can maximize returns while minimizing risk and volatility. Great asset allocation is the single best weapon in your arsenal.
The nature of the market, on a day-to-day basis, is volatility. The key to playing the investment game successfully is to allocate your assets in accordance with your age, risk profile and goals, think long-term, and keep your eye on the end game.
If you find yourself worrying about your investment portfolio or still wondering how to manage them with respect to your investments, consider getting a great financial advisor who can not only help you navigate the universe of investment options, but he or she will also provide the invaluable service of helping you to stick with your strategy.
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