Energy exposure may help you sleep better at night
President Trump Wednesday declared the cease-fire with Iran over following attacks on commercial vessels in the Strait of Hormuz.
You might want to own a dedicated energy fund in your IRA or 401(k) if you want to cushion yourself from shocks like the one that just hit following the apparent collapse of the cease-fire with Iran.
Regular stocks and bonds are down on the news, but energy futures and energy stocks are up. They march to different beats: That's the gold standard of so-called "diversification."
Many people are shocked to discover that an agreement between a serially bankrupt businessman and a terrorist regime might not be something on which they should bet their life savings. But cynicism or joking aside, you don't have to have a crystal ball (or even some healthy skepticism) if you are diversified.
I've written about this before (most recently here and here). And yes, I practice what I preach and own an energy-stock fund in my own retirement accounts, though none of those mentioned.
Energy typically does well when stock-market indexes and bonds both do badly.
Think: The 1970s.
Think: 1990, when Saddam Hussein invaded Kuwait.
Think: The 2000s.
Think: 2022.
This might be a historical coincidence. Or it might not. Energy is a prime nondiversifiable input into the economy. Most other inputs can be substituted with something else - you can eat more chicken if beef gets expensive, and so on - but energy overall can't be substituted, and even sources are hard to replace. If oil and gas become much more expensive, countries can switch to using more coal, nuclear and green sources like wind and sun, but these switches take time and are very expensive.
This is not about timing the market. It is about not timing the market.
As mentioned here before, data from Dartmouth finance professor Ken French shows that going all the way back to 1926, energy stocks have actually outperformed - if slightly - the broader U.S. stock-market index. But the real benefit isn't that they have outperformed but that they have done well at different times, lowering overall volatility and especially the risk of one of the biggest disasters that can hit a retirement portfolio: not a short-term crash but a long-term "lost decade," when your portfolio goes nowhere, or even goes down, in real, purchasing-power terms.
That's what happened between 1936 and 1948, a period of 12 years, when a portfolio of 60% U.S. stocks (equivalent to the S&P 500 SPX) and 40% U.S. 10-year Treasury bonds actually lost value in real, purchasing-power terms.
It's what happened between 1968 and 1983, a full lost decade and a half. Imagine if you were in your 40s or older when that began.
It happened between 1999 and 2009.
Memories are short on Wall Street. Many people in finance, from analysts to advisers, are in their 40s or even younger. That's fine, but it means very few have actually lived through a long bear market. Experiencing it and hearing about it are quite different things.
The global financial crisis was nearly 20 years ago. Probably more important, the stock mania of the late 1990s and the long bear market that followed are more distant memories. Few investors have any memories of the 1970s.
Vanguard's Balanced Index Fund VBAIX, a simple, low-cost index fund that invests 60% in U.S. stocks and 40% in U.S. bonds, has been in operation since January 1999. If you had invested $10,000 in that fund when it launched and just left the money there, compounding quietly, today you'd have $65,854, according to Portfolio Visualizer. Great, right?
Alas, a lot of those gains are pure illusion, reflecting the overall rise in consumer prices since then. A dollar today doesn't buy you what a dollar bought you back in 1999.
When converted to purchasing-power, constant-dollar or so-called real returns, that $10,000 has grown to $32,200, according to Portfolio Visualizer.
(I'm assuming this money was held in a tax shelter, such as a 401(k) or an IRA, so we can ignore the effects of taxes.)
But if you had instead invested 90% of your money in the Vanguard balanced fund and 10% in the State Street Energy Select SPDR ETF XLE, an index fund that gives you exposure to U.S. oil and gas stocks such as Exxon (XOM) and Chevron $(CVX)$, today you'd have more money than if you had held the index fund alone: You'd have $35,670 in constant dollars.
Much more important, though, is that the energy fund would have cushioned your losses in several downturns.
During the bear market of the 2000s, for example, the plain balanced fund made you effectively no money in real terms. Measured from January 2000 to December 2009, that initial $10,000 grew to just $10,100 in constant dollars. The 90/10 portfolio wasn't brilliant, but it was better: It gained $1,000 in constant dollars, a 10% gain instead of a 1% gain.
The 90/10 portfolio fell by slightly more during the disastrous year of 2008, by 24% in nominal terms compared with 22%, but overall it performed slightly ahead over the entire financial crisis, if we figure it started in 2007 and ended (the financial crisis, not the economic slump) in 2009.
The portfolio that included a 10% energy-stock allocation underperformed a simple 60/40 balanced fund in the decade from January 2010 to December 2019, but this was precisely when investors were making the most money on their regular stocks and bonds. Naturally, health insurance just looks like a cost when you're healthy, as does flood insurance when there isn't a flood. During and after the pandemic, since January 2020, the balanced 60/40 fund has earned you a total of 37% when measured in real, purchasing-power, constant-dollar terms. The 90/10 portfolio, including 10% energy, has earned you 48%, an astonishing 11 percentage points more.
(And that doesn't include the price reaction on Wednesday, when stock indexes and bonds fell while energy jumped.)
During the inflation crash of 2022, when both regular stocks and bonds went down, energy stocks boomed. The XLE gained 64% (in nominal dollars), if you can believe it. As a result, the inclusion of that 10% allocation nearly halved the year's losses on a 60/40 balanced fund: Overall, someone who had a plain 60/40 fund lost 17% that year, while someone with just a 10% allocation to energy lost less than 9%. That's still painful, but it's not in the same league.
This is not intended as a comment on the specific funds mentioned, the Vanguard Balanced Index Fund and the Energy SPDR. They merely provide the simplest illustrations. Both do their jobs well, with very low fees: 0.04% of your investment per year for the Vanguard fund, and 0.08% for the XLE. (Personally, I much prefer global funds to those that only invest in the U.S., but that's another story, and anyway their fees are higher. The iShares Global Energy ETF IXC, for example, charges 0.4% in annual fees.)
Nor am I making a definitive argument for a 10% energy allocation. Again, this is simply to illustrate the principle.
Nearly a decade ago, fund managers Lucas White and Jeremy Grantham at GMO in Boston published a research paper arguing that investors should have specific exposure to natural-resource stocks, including energy, but also mining and mining stocks and sometimes agriculture-related stocks. They were making not only a judgment call about valuations - natural-resource stocks were in a bear market at the time - but a longer-term one as well.
"The correlations for a basket of energy and metals companies with the rest of the market are very low by the time you look at 3- to 5-year returns, and the 10-year correlations have actually gone negative," they wrote, citing data going all the way back to 1970.
The reason, they argued: "Rising resource prices are a drag on the rest of the economy, whereas falling resource prices are a boon for the economy."
A broader resource fund is going to be less volatile, up and down, than a pure energy fund. Oddly, the exchange-traded funds also seem to have much higher fees. The State Street SPDR S&P Global Natural Resources ETF GNR charges 0.4 percentage points per year, but for that you get global and not just U.S. stock exposure.
On a personal level, I'll tell you that having an energy stock fund in my portfolio helps me sleep easy at night. Ever since Feb. 28, when the U.S. and Israel launched their attacks on Iran, investors have been waking up to discover that the war is on again, off again and on again. Without energy exposure, it can put you right off your porridge.
-Brett Arends
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July 08, 2026 13:56 ET (17:56 GMT)
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