4 Examples of How Investment and Natural Gas Strategies Work the Same Way
Editor’s Note: This blog has been updated for relevancy on May 1, 2019 titled “3 Ways Investing and Natural Gas Strategies Are the Same”
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, up-and-down line that will most likely change the next time you see it.
We use some of the same language when we describe natural gas: daily volumes, the day’s high and low and historical trends… Natural gas and stock markets are very similar, but for some reason they are rarely treated that way.
In this article, we will focus on four reasons you might think about managing your natural gas costs supply like your stocks:
1. They both accept the fact that the markets are 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 the world of natural gas, the NYMEX is the widely accepted natural gas benchmark price, and like the stock market, this is something that experts tirelessly monitor and analyze.
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 (storage, local production, etc.).
The Takeaway: Of the factors listed above can make it difficult to decide when and how to buy. Similarly, investment portfolio management is impacted by a company’s stock performance, international economics and more. Both market graphs are typically moving all the time and no one can predict where they’re going for sure.
2. They both avoid putting all your eggs in one basket.
Since we can’t predict market activity for either stock markets or natural gas markets, there are other ways you can gain some stability. This is where investment diversification strategies, such as a 401k or Target Date Fund help. With a Target Date Fund, you buy multiple different types of assets over time – leveraging dollar cost averaging to achieve budget certainty. 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. Stop shopping for a low price and, instead, build an investment strategy for your supply. 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.
4. They both allow for “I’ll do it myself” or “you do it for me” options.
Most retirement investors jump for the “you do it for me” strategy. You might work with your employer or an external investment agent because you don’t have the time or expertise to do it while maintaining a career, family life and other priorities. Instead, a diversified strategy allows for a smooth progression to invest over time without life’s interruptions.
The Takeaway: At many businesses, sourcing or facility managers are juggling much more than just energy supply. By letting your supplier help you manage your energy strategy, you can focus on other priorities and sourcing decisions.
So what does that mean for your business? The strategy you use for investments can also work for your natural gas supply strategy.
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 gives you four options that allow 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.