Oil downturn brings lesson: diversify your investments

Do you work in the oil and gas industry, have share options in an energy company you work for, or own a property in Aberdeen?

Perhaps you have a pension with the oil company you work for or feel overexposed to the downturn in the crude price?

The price of a barrel of oil is attracting a lot of publicity at the moment after falling through the floor during 2014.

With its heavy weighting in energy and other commodity companies, the Footsie did better than might have been expected last year amid the demise in oil prices and weakness in metals.

For once, the FTSE 100’s performance was very close to the other main market indices. It ended 2014 slightly down from where it started. Add back in dividends – the Footsie yields about 3.5% – and the total index return just scraped into positive territory over the year.

The price of a barrel of crude fell by 53.7% over the same period. When stocks and, in this case, oil are going straight up, it is easy to say that you will hang on during corrections.

The current downturn is a great reminder to the people of Aberdeen and the surrounding area to diversify their savings and investments into a globally exposed portfolio, with a longterm time horizon for investing, and are not exposed solely to the price of oil.

Having an evidence based approach to investing which removes speculation, reduces costs and provides global diversification gives people the best chance for a successful experience.

We advise you to speak to your financial planner to achieve this, and remember that a one-size-fits-all approach rarely works.

Even before your children buy stock, they should make sure they have a cash cushion for emergencies. This is especially true in today’s uncertain job market. The cash cushion should be adequate to tide them over at least six months of expenditure.

Next, consider any cash needs that could arise in five years or less.

This money – whatever it is needed for – should be invested in short-term bonds, which can be cashed in when required.

If there’s money left over, investors should consider a risk-based portfolio of gilts, corporate bonds and shares.