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This past December I was deployed to an undisclosed location in the Middle East, surrounded by all the glitz and gold that oceans of oil and natural gas can buy.
Of course I didn't see any of it as I was sweating it out in a building filled with black mold and a mattress that had probably had 100 people sleeping in it before me. Typical military deployment: we make it harder than it actually has to be. While I was deployed the price of oil fell over 50% from a high of $110 in August 2014 to a low of almost $45 a barrel.
I thought there wasn't anyway oil could stay that low. I began looking at my options for how to take advantageous of low oil prices and make a quick buck.
When I was in college in 2009 I noticed a similar 50% drop in the price of oil and thought that it would be a good time to purchase some oil either through an ETF or by purchasing oil companies. Unfortunately I never pulled the trigger on my oil speculation, resulting in me missing out on double digit returns. I definitely wish I had taken on more risk as a youth.
I'm going to get into the details of my speculative investment below. If you:
- have debts over 3%
- have ANY credit card debt
- are not maxing out your Roth TSP contributions
- are not maxing out your Roth IRA contributions
- don't have an emergency fund
Then do not make a speculative investment like this. It is EXTREMELY risky and basically gambling. Treat any money you invest like I did below like money at the casino: the house always wins and you have to be willing to lose what you walked in with.
Please, get your financial life together before making fun plays like this. I fully expect to lose all the money I've invested like this. Plus, I did it the most expensive way possible. I'll show you a much easier and cheaper way to make “Vegas Money” investments like I did below.
The Wrong Way to Invest in Oil Stocks and ETFs
I have a brokerage account with Schwab that I opened back when I took out my cadet loan in 2008. I wish I had opened it with Vanguard instead, but I didn't know everything I know now about expense ratios and keeping investing costs low. It's sat dormant for the past few years, other than to make random speculative trades when I'm feeling lucky or see an opportunity.
I looked at several options and decided to divide my $1000 speculative oil investment into four stocks and ETFs.
- GST – Gastar Exploration Inc. A “hot stock tip” from a buddy of mine in my squadron. I think they were supposed to sign some big fracking deals before the price of oil collapsed? I can't remember, but it's a good lesson in why you shouldn't trust your squadron buddies for stock tips.
- RIG – Transocean Ltd. Ever heard of the Deepwater Horizon BP spill in the Gulf of Mexico? That was one of their rigs. They are a company that offers offshore contract drilling on a daily rate. If you've got a ton of oil you can't get out of the ground fast enough, RIG will get it for you at a price. RIG does well when oil is doing well. They got hit pretty hard when oil prices dropped, so I figured here was a buy opportunity. If oil prices come back, they'll be one of the first companies to benefit.
- BNO – United States Brent Oil Fund, LP. This is a confusing ETF (never invest in something you don't understand!) but it basically purchases oil futures in the commodities market to mimic the daily change in the price of oil. Confused? Yeah, me too kind of. All I know is if the price of oil goes up, this ETF should go up as well. Definitely a speculative play on my part.
- UWTI – VelocityShares 3x Long Crude ETN. This is an Exchange Traded Note, different from an ETF (exchange traded fund) because it's issued by a bank, in this case Credit Suisse. If Credit Suisse ever collapsed (like Lehman Brothers back in 2008), I would be left with nothing. While that's a remote possibility, tell that to everyone who owned Lehman Brothers shares back in 2008. It's designed to replicate the daily change in price of crude oil, multiplied by 3. So if oil goes up a $1, you get $3. If it drops a $1, you lose $3. They also sell an inverse ETN, which does the same thing, but opposite. This is a very risky and speculative
I Am a Bad Stock Picker and You Probably Are Too
As you can see, my performance has not been great. While the rest of the market is up, I'm down almost 17% from December to May. This is why I invest all of my retirement investments automatically into simple, low-cost, and diversified passive index funds like my Roth TSP and Vanguard Roth IRA. Instead of just owning a few stocks that cost me $9 each to buy, I own shares in thousands of companies around the world and pay pennies to do it.
Even though it seemed like oil prices couldn't go any lower, they did. Timing the market is almost impossible. While there are certain indicators you can look at (like the Shiller PE ratio, or the inflation adjusted price to earnings ratio over the last 10 years) and see that the growth is probably not sustainable, you can still miss out on massive growth opportunities by getting out of the market. Someone famous said “it's about time in the market, not timing the market.” That's very true, which is why I invest automatically every month into my predetermined asset allocation. No one can predict the future, especially you.
It's extremely difficult to beat the market. In 2014, 86% of actively managed funds failed to beat their index benchmark. It's just as bad over 5, 10, and 20 year periods, where 80%+ can't beat their benchmark. These are professional fund managers who are paid millions every year to beat their benchmarks. And they can't! What makes you think you can with your Scottrade or Schwab account? Good luck buddy. My money is on the index funds.
Despite the overwhelming evidence in favor of index funds, sometimes it is fun to make some speculative plays in the stock market, if you've maxed out your tax advantaged retirement contributions. However, I went about it the wrong way: I paid too much to place my $1000 bet on oil!
My Oil Investing Mistake: Paying Too Much
I paid $8.95 for each of my trades at Schwab. That's $35.80. Before I even started I was down 3.5%! Whatever return I get on my investment, it needs to 3.5% higher to make any profit. Plus, that $35 only bought me 4 stocks. What I should have done with my play money is gone with a much cheaper and efficient option: Motif Investing.
Motif Investing is a new online broker that specializes in building a portfolio around a theme. For instance, oil speculation. For just $9.95, I could buy up to 30 oil related stocks and invest as much or little as I wanted into each one. Instead of just 4 stock and ETFs, I could have spread my $1000 investment over 30 companies, giving me much more diversity and lowering my risk.
If you can't think of a theme, you can then select from one of 150 pre-made Motifs, covering topics like
- Chinese Internet companies
- Lots of Likes (Companies that have the most likes on Facebook)
- Fracking – more oil!
- Wearable Tech – Apple Watch anyone?
- BRICS – invest in the rising 2nd world nations: Brazil, Russia, India, China, and South Africa
Besides the professionally developed motifs, you can also look at user generated portfolios. If there's a particular user who's consistently makes good motifs, you can invest exactly as they do and reap the reward of their research and hard work. It can make for a social investing experience. That's definitely not required when you're investing for the long run, but it can be fun with your play money.
I only ended up owning 4 stocks, whereas if I had invested with Motif Investing I could have owned 30 oil stocks for only $9.95. Check it out and don't make the same mistake I did.