Like defense stocks, it is not a bad idea to have a small portion of oil and other energy stocks in your portfolio.  Five percent is not a bad number.  Energy stocks tend to be volatile.  They can be more volatile than the price of oil.  If the economy goes into free fall again, oil stocks may take a hit.  That’s why you should limit yourself to five percent.

Oil stocks provide a good hedge against a few things.  Most people use gasoline, so it is a good hedge against the price of gas.  The two things don’t move exactly the same, but there is certainly a strong correlation.  Oil and other energy stocks are also a good hedge against inflation in general.  Since oil is a commodity, it is likely to go significantly higher with high inflation.

The possibility of war with Iran has seemed to diminish, but it is another reason to hold oil stocks.  If there is war, Iran could retaliate by trying to stop the passage of oil through nearby waters.  This would be devastating for the whole world economy.  You could see oil go to $500 a barrel easily.  Hopefully Obama has his hands full enough and will not start anything there.

It is hard to pick stocks because any individual stock could go down even if oil goes up.  Look at energy mutual funds like Fidelity’s energy fund (symbol: FSESX).  Again, keep your exposure fairly low due to the possibility of another crash in the stock market.