Evaluate and Rebalance your Portfolio

by John Dalt

Dec 17, 2008 

I wrote yesterday about taking the time evaluate and each of the companies you have in your retirement account. We have to monitor the companies we own, if there are any weaknesses to their business, titanic shifts such as we have had in the last few months can expose them. 

A perfect example of a changing business model is the Canadian Oil sands. Public information told us the cost of production was over $50 a barrel. Oil was going up every day and predictions of worldwide shortages were on the pages of every daily newspaper. Since July, oil has dropped from $147 to $40 a barrel. Many of the hottest oil plays from a year ago are underwater, stopping projects and trying to conserve cash until oil prices stabilize and rise back to profitable levels. If you did not get out of some of these riskier plays on oil’s slide down you have a decision to make. Many of the oil sand companies stocks are down over 70% from their 52 week high. Do you hold on or sell at today’s depressed prices and put your money to work in a more favorable sector? I cannot give specific investment advice, but I will tell you, I put in orders for United States Oil ETF (USO) today. Warren Buffett says to “Buy when there is blood in the streets”, and “Be greedy when others are fearful”. The oil market looks scared to me. Does that mean oil will go back up tomorrow, I do not know when, but it will go up. We still burn it; we still need it, regardless what OH! BAMA! says about breaking our dependence on oil. You cannot power cars with nuclear, wind, or solar. Oil is in plastic, cleaning supplies, fertilizer, fabrics and so many other items we use daily. I talked with a friend of mine that trades oil in Houston. He told me the longer the price of oil goes down and stays down, the faster and higher it will go when it rebounds. I could not agree more. Every bubble busts and then gets oversold. That is where we are now. Consider that today OPEC announced cuts of two million barrels per day from production. They will probably cheat on compliance, but the handwriting is on the wall, cheap oil and thus cheap gasoline are not long for this world. Today the market ignored bullish news and went down! This sentiment will change to a small threat to supply will cause price spikes just like it did six months ago, and you won’t be able to stop the rise in prices with additional supply. 

You should also look at the allocation of funds to different stocks and sectors. It is important to diversify your holdings across different sectors. For example, you do not want your whole portfolio in oil companies, or for that matter pharmaceuticals, or retailers, or railroads. You get the idea. We may think we know where the next hot sector is, but history tells us not to be so sure. Left hand curves are thrown at the economy all the time. If your holdings in one sector have done better than another you may want to ‘rebalance’ your portfolio by selling some that have done the best and buying some of the laggards to bring ‘balance’ back to your sector allocations. Balancing your holdings across sectors will give you the best chance to avoid a downturn in last year’s best sector. Remember nobody is a 100% winner; we all stumble once in awhile. 

WARNING:    The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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