The startling plunge in oil prices over the past few months is a stark reminder of the importance of sound financial planning and disciplined investing.
Canadian equities markets have been rattled lately by the unrelenting decline in oil prices, as the resources-heavy Toronto Stock Exchange has taken investors on a stomach-churning ride. And it’s not just energy companies’ stocks that are feeling it. The effects of that one (admittedly critical) commodity price are cascading through the economy, sending policy-makers scrambling to recalibrate their budget plans.
Cheaper oil affects a host of fundamental economic factors, such as consumer spending, business investment, inflation and exchange rates. The price of oil echoes through the provincial economic landscape, too. Suddenly, the oil-rich regions aren’t looking so hale and hardy, and the manufacturing-driven provinces may be powering the national economy once again. This, in turn, affects government finances, and may alter tax policies down the road. Interest rate expectations must be modified, too.
All of this also can have a major impact on individual household finances – affecting short-term spending habits, investment portfolios and financial plans.
The lesson for clients and their financial advisors is that there is great value in financial plans and investment strategies that aim to dampen these excesses. Average investors should be conscious of insulating themselves from extremes (both booms and busts) in asset and commodity prices, and be vigilant about portfolio risks that may be quietly accumulating.
Economic realities are ever-changing. In recent years, the era of cheap oil looked like it was gone for good. Yet, those trends have sharply reversed themselves in recent months, and cheap oil is back with a vengeance. It’s important to remember that this, too, will pass, and that the timing and amplitude of these cycles is uncertain.
Following a disciplined investment plan may seem to be a difficult task when certain sectors are booming and others are not. But the recent turmoil is a blunt reminder that this approach tends to pay off in the long run.
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