Oil is everywhere. Besides food items, it is a commodity that is used every day throughout the world, and is invested in by the billions every year as an opportunity to make and grow wealth.

    Unlike food, however, it is perhaps the most maligned commodity in the world as well, not just for what is supposedly does to the environment but also the ways in which companies extract the commodity to put it into the market.

    Most food comes out of the ground too, but we digress.

    The Prevalence of Oil

    Oil is not just about jet fuel and car fuel. Oil is even more prevalent than that, as much of it not only powers engines, but it is also used in cosmetics, some hair products, lubricants and building materials, just to name a few. In just one day, the world consumes about 87 million barrels of oil, which translates into 3.65 million gallons. Per day.

    That is just the demand side. There is the supply side too, which is not entirely a zero-sum game. At least, it’s not in the current market, as prices are looking to find an equilibrium point since OPEC (the Organization of Petroleum Exporting Countries) cut back its daily production recently in order to send market prices higher.

    The Supply vs. Demand Dance

    Because so much oil is consumed each day, oil is arguably the most volatile commodity in the market. Oil essentially works on margin, meaning that prices will quickly spike or depress on any rumors of increased or decreased supply or demand, disruptions in transit or trade, and even economic factors having to do with various oil companies and their oil-exploration successes or failures.

    With that as a backdrop, it makes perfect sense why the Keystone XL and Dakota Access pipelines have gotten so much attention int eh news and in the markets. With technologies allowing oil companies in the U.S. and Canada to extract more oil from the ground than was thought possible 20 years ago, there is a surplus of oil in the markets, and that drove prices down to levels that were not sustainable for many oil-exporting countries (we’re talking $30-$35 for a 42-gallon barrel at one point).

    When that happens, some countries are forced to draw back the amount of oil they produce and export to other countries in the hopes of depressing the supply so prices will go up. They would much rather see more demand, but in the current environment they are seeing less demand partly because of increased domestic production of oil in the U.S. and Canada, which is collectively the largest region of the world in oil consumption.

    In the Pipeline

    One of the challenges of oil is getting the oil from the ground to refineries where it is turned into various oil products, such as several grades of jet and automobile fuel and lubricating or base oil for cosmetics, lubricants and even some cooking oils. Transporting oil can be a pricey endeavor, whether the oil is shipped by boat, train or truck.

    Pipelines have become all the rage lately as a way to have oil extracted in North America and sent along a pipeline to refineries in the southern part of the U.S., where the finished products are then shipped to ports domestic and international. Pipelines take a large initial investment in permitting, environmental anf financial feasibility studies as well as construction, but over time they are expected to greatly reduce transportation costs and essentially provide more oil to the refineries and increase the supply in the market, which keeps the price affordable for consumers.

    Oil as a commodity is volatile anyway, but it has especially ridden a roller-coaster with all of the stops and starts to Keystone and Dakota Access pipelines in recent years. As they say, time is money, and the longer these pipelines take to be completed, the more expensive oil becomes for everyone.

    Investing in Oil

    If you are looking for a commodity in which to invest a portion of your portfolio for the sake of diversification, oil may be a good choice if you don’t mind the volatility. As long as oil has been around in the market, it has never been worthless, but its price fluctuates on the tiniest of rumors of anything involving supply or demand.

    If you want to invest in oil, never take a short-term approach. And pay close attention to companies involved in the oil industry, from production companies like Exxon Mobil to oil exploration equipment companies. As the market ticks upward, these companies will all benefit because increases in price means an increase in profit, as many operational costs stay relatively steady regardless of the supply or demand.

    However, if demand continues to increase and a company decides to open more exploration, that company may see its stock drop because the profits that may be gained by higher oil prices will be spent on the expense of a new exploration that may or may not prove fruitful.

    The Bottom Line

    Oil is a commodity that is interwoven in all parts of the economy, as there are very few industry verticals that don’t consume some oil to operate. Paying attention to oil supply and demand notes that come out weekly can be a hint as to where to look to invest. But don’t look for a quick buck in oil; it’s far too volatile to really time the market and be able to jump in and out as you see fit. Ride out its volatility and see it smooth out over a long period of time. There is a supply in the ground that may last the world a couple of centuries, and while alternative energy sources are trying to gain traction in the market, oil will still be needed in many economies for the foreseeable future, so there will always be a reason to be bullish on oil.

    To read the rest of this original content and to learn about our many other top picks, please enter your email below to receive our periodic investor newsletter.

    Get the best financial news straight into your inbox!


    On the one hand, you want to be bold in your investing. On the other hand, you would love to shelter it from heavy risk, especially risk that is unnecessary for the returns you seek.

    Would housing be a good shelter for investment money, like it is for your family?

    About Real Estate: The Good

    Among the various investment vehicles, real estate is a unique vehicle because it is one of the few tangible assets, and it is about the only investment in which the owner or investor can have control over the valuation of the property – such as, whether to maintain the property, replace roofs, get new tenants, evict bad ones, etc.

    Real estate can add diversity to your portfolio, whether you buy a single property in which you will reside, or whether you will buy one or several buildings to rent or lease. There are some advantages in getting involved in real estate as a part of your overall portfolio:

    1. Less risk on yields. With real estate in your portfolio, you can maintain any current yields you’re receiving with decreased risk, as real estate is a bit more stable than most vehicles (stocks and commodities, for example) and rarely becomes worthless. Real estate could also maintain your risk level but increase your yields, especially rental properties that remain rented consistently.
    2. A hedge. No, we don’t mean the bush being a shelter, but rather that real estate can be a hedge on inflation. Many rental properties have stipulations in their rental agreements that allow the owner to increase rent with each new lease according to an increase in inflation, so as long as the property remains rented, the income received will always be a step ahead of the cost-of-living increase.
    3. While housing markets have their bull and bear runs like other investments (the existing-home market is running at a high pace nationally of late), real estate is never worthless and as a long-term investment it can average 4-5 percent growth annually, which keeps pace with inflation. It makes sense to park some of your nest egg in case inflation saps your buing power later.
    4. Unlike stocks or other commodities, where market forces tend to dictate price and value, with real estate you own you have some control over the value of your property in the market. If you maintain it properly, keep up good curb appeal and have reasonable rents where it is rented regularly and you have a good vetting process for quality tenants, you can increase the value of the property regardless of the market. When you don’t do these things, your property can drop in value regardless of the market.

    About Real Estate: The No-so-good

    Also, you should know that while real estate has a lot of upside, there is also some downside just like with other investments. Before you decide to get into real estate, you will have to weigh the pros mentioned above with these cons:

    1. As you might imagine, getting into real estate involves a heavy initial investment (unless you get into a REIT, which will be explained in a minute). Not only that, but the time and cost to maintain and operate it, and potential cost when a tenant doesn’t pay the rent, can also be expensive.
    2. No liquidity. If you need money quickly, don’t put that money in real estate. Real estate is very difficult to buy and to sell, and any money you might need from a real estate investment can’t be taken out until you sell the property. Your money is locked in, as the property can take weeks or months to sell.
    3. Market timing. Because it is so hard to buy and sell properties, trying to time the market to take advantage of bull or bear runs is a matter of luck, hoping that the run lasts long enough for you to get in or out accordingly in the weeks or months it takes to buy or sell. And any run doesn’t happen quickly, so you could miss the beginning of it because the movement is subtle over months – and by the time you notice it may be too late.

    What about REITs?

    A low-cost option for getting into real estate is via an indirect route called a REIT, or a real-estate investment trust. A REIT is an investment vehicle that is traded in a similar fashion to a stock. To invest in a REIT is to invest in a company or association that owns and operates rent-bearing properties such as apartment buildings, shopping centers, commercial or industrial facilities, and residential properties.

    The advantages of a REIT as a real-estate investment are that a REIT is like a stock, so the money invested is fairly liquid and you can get money by selling your shares in minutes with a phone call to your broker. Also, like a stock or bond, to invest in real estate through a REIT takes a minimal up-front investment of $500 or $1,000, instead of six-figures like an actual real property. Also, REITs can provide better returns on your investment as an annualized percentage over time, that far exceeds that of inflation in some cases.

    The downsides to investing in REITs are that with such a small investment, it will be hard to make significant monetary returns. Though you have a much larger initial investment in real property, it can be a shorter time to make $25,000 on that investment than if you invested $5,000 in a REIT. Also, with a REIT you don’t own any property yourself, so you are not in control of increasing the value of your investment. REITs also have the risk of being worthless and have volatility that is more significant than direct real property.

    In Summation

    Real estate can be a wonderful investment, whether you buy real property or go into a REIT. However, because of its various pros and cons, it should never be a large portion of your portfolio but instead should be part of a diversified group of assets that can provide some shelter for your nest egg, stability in the long-term and beat inflation to allow you to have more buying power when you sell.

    To read the rest of this original content and to learn about our many other top picks, please enter your email below to receive our periodic investor newsletter.

    Get the best financial news straight into your inbox!

share this