3 Ways Investing and Natural Gas Strategies Are Similar3 min read
Have you ever compared the Standard & Poor’s 500 (“S&P 500”) Index and the New York Mercantile Exchange (“NYMEX”) side-by-side? If you’re like most people: no, why would you? But when you graph the activity of most markets over time, you’ll see a jagged line, bouncing up and down with no pattern, and it will most likely change the next time you see it.
Natural gas is traded as a commodity, which means the pricing activity in the market can behave very similarly to what we see in the personal investing sphere. This is good news because most of us are much more familiar with our retirement strategies than what is going on within commodity markets.
In this article, we will focus on three reasons you might think about taking notes from your 401k plan or other personal investment portfolios to help manage your physical natural gas supply strategy:
1. In both, the market is always changing.
The S&P 500 is an index commonly used as a benchmark for the U.S. stock market. Investment experts monitor and try to forecast activity, but no one can predict how prices will change day by day. In natural gas, the NYMEX is the widely accepted benchmark price, and like the stock market, this is something that market analysts tirelessly monitor.
Multiple variables at each point in the delivery system of the natural gas market create this volatility from production to the final delivery point. Regional supply and demand factors make gas either more or less expensive than the NYMEX benchmark, adding another dimension to monitor: the first: the fluctuations at Henry Hub (NYMEX) and the second: the fluctuations as gas is delivered to you (e.g., storage, local production, etc.).
The Takeaway: Volatility isn’t going anywhere, and no one can predict where they’re going for sure.
2. They both avoid putting all your eggs in one basket.
Since volatility is here to stay, there are other ways you can gain some stability. The key to a strong investment strategy is diversification. Many businesses are quickly adopting this concept for purchasing natural gas.
The Takeaway: You can diversify the NYMEX, basis or both cost components to achieve the budget certainty you’re looking for. Think about it as instead of buying a collection of stocks, you’re buying a collection of dates. Buy once on January 1st, buy once on February 1st and so on, to achieve more balance and budget certainty over time.
3. They both customize plans based on risk tolerance.
When you started working, your 401K portfolio was likely set up to have greater flexibility to take higher risks because you have time to build back up from any potential market dips. As you near retirement, you level out to a more conservative portfolio and take fewer risks. While this formulaic progression over time doesn’t quite equate to how a company would buy natural gas, you do have the flexibility to control the level of market exposure you wish to assume.
The Takeaway: Energy decision makers sometimes set their goals around hunting for the lowest possible price. However, through an investor’s eye, that strategy is like buying for all of your retirement on one day. You may not get the lowest price – you can get a more consistent price.
By thinking long-term, you can gain more value. If you diversify for less than a year, it’s possible you might gain some benefits of market lows. On the other end, with a three to five-year strategy, you have more time – or think “stocks” – to dollar-cost average. This can help you better achieve your desired results of steadier, more predictable natural gas costs as opposed to what you might be gambling to achieve by purchasing all on one day.
So what does that mean for your business? Don’t fight the current. Diversify to help manage market volatility and helps to mitigate price risk over time,
A strategic diversification plan can be built to meet the needs of your business. To return to our comparison, despite age, career path or financial situation, thousands of people trust this same strategy – relying on a diversified retirement investment plan for the long-term.
Constellation’s SmartPortfolio program, which offers multiple volatility protection levels, allows you to choose the right plan based on your preferences for budget certainty, automated diversified purchasing, managing your risk over time and using dollar-cost averaging. To learn more about finding the right natural gas strategy for your business, contact us today.