Saturday, February 28, 2015

More thoughts on diversification - My job in the oil patch

With oil prices in the doldrums, my job security has suddenly declined big time; the Alberta’s real estate and rental real estate market may be affected as well but that is not yet that discernable. Yes there are a lot of new listings; but does that mean that properties are dumped in a panic and prices crash? I don’t know yet – it may take a while for the fog of war to lift and reveal a clearer picture.

If I owned a lot of oil stocks, in particular junior oil stocks right now things would definitely look a lot dicier. As an oil industry employee, my employment and salary are tied to oil and gas prices. Neither look great right now. I am participating in the company savings plan which is invested in shares of my employer and in cash. In spite of my employers complementary contributions, the losses in hat savings plan have been adding up. Great for off-setting capital gains elsewhere in my portfolio but not so great for my moral!
So, if my oil job salary brings in cash flow every month, just like my stock dividends and rental income add to cash flow then shouldn’t I consider my oil & gas expertise to be an asset just like my stock and real estate holdings?  If the answer is yes, than how much does my oil & gas expertise add to my net worth? Also, with maybe just a decade or so left prior to my permanent withdrawal for the oil industry would that net worth be less than that of a 25 year old, assuming there is a long career left for him or her in the oil patch?  Basically, isn’t that a matter of Net Present Value (NPV)?
Say my annual salary is $100,000 and I’ll be making that plus a 4% annual salary increase for the next 10 years, with an investment horizon of 25 years, what is the NPV of my job? Spreadsheet please!  So for an old geezer such as myself, a $100,000 job would have a NPV of $757,000 and for a 25 year old, it would be worth $1.3 million (this does not take into account the cost of living and taxes but then neither would that typically figure in your investments).
Now, when allocating your net worth to various assets, you would need quite a large portfolio without oil before $1.3 million or even $757,000 would represent the oil & gas sector's market weight of the TSX or even worse market weight of the Dow Jones or S&P500!   Add to that your oil holdings in your company savings plan and your asset allocation would require even less oil and gas holdings in your stock portfolio.
Many oil workers, contrary to the above love investing in junior oil companies and mining. But is that putting all your eggs into one basket?  I think so and as such, petroleum industry workers should – no matter how tempting – avoid investing or worse speculating in oil and gas.  The same would be true for an auto worker in Eastern Canada regarding investing in the auto industry.

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