Why You Shouldn't Rush to Invest in Energy Just Yet

Are you suffering from investing FoMo (fear of missing out) when it comes to the energy sector? When the term FoMo mainstreamed in 2010, it described sentiments and actions related to social media interactions. Since then, FoMo has evolved to encompass more domains, and investing is no exception.

If the latest headlines about surging energy stocks1 stoke that sense of FoMo, you're not alone. The energy sector — which includes energy stocks, clean energy stocks, oil stocks, and natural gas stocks — continues to surge. Indices like the S&P 500 Energy Sector Index are up over 50%2 for the period between January 3, 2022 (the first stock trading day of the year) and May 26, 2022. Investors and pundits alike have watched sector performance skyrocket while national and global events surrounding the sector continue to unfold.

The sector's recent performance could (rightfully) cause some serious FoMo for anyone not currently invested in energy stocks. Add in the recent decline in other markets and it's not surprising that investors are wondering if it's time to get in. If you're worried about missing out, here are a few things to consider.

How long have I felt this way?

Above all else, remember that markets are naturally volatile.

Unpredictable and unforeseen factors can turn today's hot ticket into tomorrow's stale idea at breakneck speed. Energy sector stocks soared in 2021, becoming the S&P 500's best performing sector, after being the worst performing sector the year before. In other words, while energy stockholders are currently enjoying the bounce, that wasn't the case in 2020.

In a recent article about short-term risk, the SEC cautioned investors against making investments due to bubbles or manias.3 "This rapid rise is usually followed by a contraction in the investment's price," writes the SEC.

Who is informing me?

We all probably know (or know of) someone who "bought in" at the right moment, capitalized nicely by getting out at the right moment, and rode off to their financial “happily ever after." The luck and timing tale is as old as Wall Street, and it's a pretty tempting idea for even the most otherwise prudent investors at times. Yet, for anyone who's managed that feat, there are untold stories of others who came after them and didn't make out nearly as well.

That's why it's important to consider the messenger when investing in popular sectors, ideas, or products. Investors can easily fall under the spell of "noise trading," which the SEC explains as the making of investment decisions "without the use of fundamental data (that is, economic, financial, and other qualitative and quantitative data that can affect the value of the investment)." 3

The SEC further cautions that "Noise traders generally have poor timing, follow trends, and overreact to good and bad news in the market."