The Risks of Investing in an Energy Stock Portfolio

Some laws require companies to invest in green energy.

While many investors prefer to build a widely diversified portfolio of stocks and mutual funds in many different industries, others prefer to concentrate their holdings in areas such as the energy sector. It is true that investing in energy stocks can be a smart move, but concentrating solely on that one industry carries risks. From new laws and regulations to slashed dividends, you need to be aware of the risks associated with energy stocks.

Lack of Diversification

Concentrating all of your money in one sector of the market is always a risk, and that is definitely true with an energy stock portfolio. If you put all of your money into energy stocks and that sector falters, you could lose a great deal of money, even if the rest of the stock market does well. That means you would lose not only the money within your portfolio, but also the money you could have made if you had a more diversified portfolio with exposure to many different industries. If you do want to make a play in energy stocks, you could do so with a small portion of your overall portfolio, perhaps 10 percent, and invest the rest in a more diversified manner.

New Regulations

Federal, state and local regulations can have a huge impact on the energy industry, and on the profitability of the stocks in your portfolio. Many states have the power to regulate how much energy companies can charge for the power they produce, and that can place a strain on their profits and their potential for growth. Other regulations, like requirements that a certain percentage of energy come from green sources, can further strain the bottom line and create problems not faced by other industries. It is important to look at current and proposed laws and regulations before investing in an energy portfolio.

Choosing the Wrong Stocks

Whenever you put together any portfolio, you run the risk of choosing the wrong stocks. Building a diversified portfolio consisting of many different stocks can protect you somewhat, but chances are you could still have a few losers in the mix. The poor performance of those stocks could drag down the rest of the portfolio and leave you with less money than you started with. If you plan to build your own portfolio of energy stocks, it is important to track their performance carefully throughout the year.

Lower Dividends

Many people invest in energy and utility stocks for the dividends, and many stocks within that industry do provide excellent returns. Even so, there is always a risk that an individual company, or several companies within the same industry, will choose to cut, or even eliminate, their dividends. If the energy stocks in your portfolio do decide to trim their dividends, you obviously lose out on the cash flow you had been getting. In addition, that lower dividend payment makes the stock less valuable to other investors, and the stock price could fall as a result.

References

• The Street: Not So Green Energy Stocks With Lower Risk
• Noble Trading: Sector Fund Advantages and Disadvantages