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Why adding energy stocks to your retirement fund may be a smart move

By Jason Notte/

Just because gas prices are fluctuating doesn't mean the amount of energy investments fueling your retirement fund should fluctuate with them.

Retirement planning is a long-term strategy. Don't fixate on gas prices on the road ahead, but those several miles down the line.

"Some people see energy stocks crashing and sell everything," says Anthony D. Criscuolo, certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla. "Others want to put everything in U.S. large-cap stocks like the S&P 500 index because it's done well over the last couple years. It's human nature to be overly optimistic or pessimistic in believing recent market trends will continue."

There's an actual term for that jumpiness investors feel when current events rattle their faith. "Recency bias" isn't exactly rare, but it's one of the more dangerous quirks of investor psychology. Criscuolo advises taking the opposite direction of recency bias when rebalancing stocks. Investors should sell their top performers and add to their bench of underachievers.

"If you're underweight in natural resources and energy stocks, it's a great time to add to your holdings," Criscuolo says.

He recommends putting 7.5 percent of equity portfolios in natural resources funds that invest in energy, materials and similar stocks. Foreign stocks have also been down recently, also making them a good choice when rebalancing a portfolio. In the current climate, about 35 percent of equity allocations should be in foreign funds.

To what end? To protect your investments. Criscuolo said it's a good idea to rebalance whenever any share allocation gets about 10 percent out of whack. In that scenario, a 35 percent foreign equity stake needs to be pared down when it hits 38.5 percent or higher, or beefed up it if it dips below 31.5 percent.

"If you allow your portfolio to simply 'follow the market' and never or very infrequently rebalance, you will end up with high allocations to assets that have done well recently and low allocations to investments that have performed poorly recently," he says. "This tends to increase the risk in your portfolio over time."

When investors sell recent winners and buy more recent losers, it's simply selling high and buying low without hitting the top or bottoming out. Rebalancing will lead to superior long-term results because investments revert to the mean over the long haul. Let the young guns time the market. A retirement fund needs some stability.

Investing also doesn't have to be costly. Browsing mutual funds and ETFs ensures that investors are using the most cost-efficient ones available, Criscuolo advises, as mutual funds often create new share classes that have a lower expense ratio.

"You may also find a very similar fund or ETF that has basically the same market exposure, but much lower expenses," he says. "But be mindful of the trading costs and possible tax costs to switching out an investment. It doesn't always make sense to trigger commissions and taxable gains just to save a few basis points of expense ratio."

Also, investors should keep the tax implications in mind as they rebalance, he says. Those who can get rid of some active funds that trigger high capital gains and thus tax burdens year after year should do it.

Moving certain burdensome assets, such as REITs and high-yielding bond funds, into IRAs or other tax-deferred accounts can also minimize the annual tax hit.