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If Oil Stocks Are Killing Your Portfolio, Here’s an Idea…

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Dear Fellow Fools,

It’s a bloodbath in the Canadian energy sector. As oil tumbled to a five-year low  on Monday, shares in any company related to this sector were bludgeoned. Just have a look at the following list, which contains the five worst performers in the Canadian market after Monday’s slaughter.

Company Name 1-Day Performance 30-Day Performance
Pacific Rubiales Energy -20.1% -46.1%
Lightstream Resources -16.5% -30.7%
MEG Energy Corp. -15.4% -33.4%
Legacy Oil + Gas -13.8% -42.1%
Canexus Corp. -13.3% -10.8%

Source: Capital IQ

With the exception of Canexus, all are directly tied to the production of oil, and as you can see, Monday’s decline was not a one-off occurrence. If you’ve owned Canadian energy stocks since the middle of the year, there’s a good chance your portfolio is worth less now than what it was then.

Potentially a lot less.

The thing is, even if you don’t have direct exposure to the Energy sector and have followed the advice of pundits – that is, purchase a Canadian index fund tied to the S&P/TSX Composite – the energy decline has still had a significant impact on your net worth.

The reason is that the Energy sector comprises 20.9% of the S&P/TSX Composite Index, even after plummeting by 26.3% over the past 6 months. And if we throw Materials stocks into the equation – you know, like all of those gold companies that can’t seem to find a bottom, either – almost 32% of our benchmark (and your index fund) is comprised of commodity-oriented companies.

To take it one step further, 36.5% of the S&P/TSX Composite is made up of Financials, a large chunk of which is the Canadian banks. Though not as directly tied, the Canadian banks do a material amount of business with Canadian resource companies.

Simply put, our market goes where commodities go.

Now what?

Well, we feel for you. Especially for those who thought they’d taken the high road by indexing. But the past is the past, and depending on who you believe, this may just be the start of the doom and gloom for this country’s resource companies. If commodity prices remain where they are, or fall further, there is almost certainly more pain to come.

That leaves investors in quite the pickle…

Cash earns nothing. Fixed income yields and spreads are puny. And now the Canadian stock market might be in for a period of lacklustre, at best, returns.

What are we Canadian investors supposed to do now to make our hard earned savings grow and achieve the financial freedom that we so crave?

I’ll tell you: look beyond the Canadian border for your equity exposure!

Fools, this kind of scenario is exactly why we established Stock Advisor Canada the way we did. The root of our member-only service is to provide 1 Canadian and 1 U.S. stock recommendation each and every month. There’s plenty more to it than that, but the foundation was built on a desire to provide Canadian investors with a more diversified collection of recommendations than what is otherwise available by simply scouring the TSX.

While a very small number have questioned this approach, we have held steadfast in our belief that a blend of both Canadian and U.S. stocks is far superior to a purely patriotic collection.

And it’s working.

Currently, our Scorecard, which tracks every one of our recommendations’ performance relative to the S&P/TSX Composite, shows our Canadian recommendations are slightly ahead since we started last October. Our U.S. recommendations, on the other hand, have very handily beaten the Canadian market. Combined, as it stands , we’re much further ahead thanks to our U.S. recommendations than otherwise would have been the case.

That’s the beauty of diversification.

A look in the mirror

I happened to catch an interview with Kevin O’Leary on BNN this week and, as you might imagine, the negative impact that energy and commodities in general are having on Canadian investors was the focus of the conversation. Is BNN discussing anything else these days?

Though a touch brash, O’Leary’s views are occasionally worth paying attention to – in my opinion. During the interview he indicated that it’s times like these that we need to step back and examine what we didn’t do right and try to fix it.

Assuming the value of your portfolio has been eroded by the energy wreck, the answer as to what’s gone wrong could be a lack of diversification. Even though you may own a number of individual securities, if all of these holdings are somehow tied to the price of oil (or name another commodity), guess what – you may not be properly diversified.

And unfortunately, the same goes for those of you who simply own a Canadian index fund.

As for how to fix it – we think you’d be very well served by joining our Stock Advisor Canada service. Although we’ve made some energy-related recommendations, from both the Canadian and U.S. markets, it’s an eclectic and wide-ranging mix of companies that you’ll see on our Scorecard after you sign-on.

With a mix that includes a Canadian food court dynamo and the South American version of e-Bay – diversification is a leading characteristic of Stock Advisor Canada.

And thanks to our fluid rating system, you’ll know exactly which ones we think you should focus your attention on right from the get go.

But as alluded to, these recommendations are just the beginning.

Our goal is to not only make you a lot of money by investing in Canadian and U.S. stocks over the long-term, but to make you a better investor. To help achieve this goal, you’ll also have instant access to every piece that we’ve ever published within the service the moment you sign-in.

And at a very limited-time, introductory price of just $49 for six-months*, the only thing of significance that our service might cost you is time – depending on your appetite for reading.

Best of all, if you sign-on and after poking around determine the service is not for you, we’ll happily provide a full refund within the first 30 days (and prorated thereafter).

This is a risk-free proposition.

If you’ve taken a hit, and are ready for a new approach, we’d love to have you jump on board. Simply click here now to take advantage of our limited time offer!

Join us!

Foolishly yours,

Iain Butler, CFA

Chief Investment Adviser, Motley Fool Canada


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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Iain Butler does not own shares in any of the companies mentioned.

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