Just like oil prices, other energy stocks and the funds that invest in them are on a meteoric rise. The Vanguard Energy Fund, for example, has witnessed its share price rise more than 50% in the past year, as of July 31, according to officials at the Valley Forge, Pa., fund complex. As a result, Vanguard took the unusual step off issuing an investor warning at its Web site.
"Unfortunately, many investors fall into the behavioral trap of buying what has performed well in the past," said Joseph Brennan, a principal in Vanguard's Portfolio Review Group. "This sets many investors up for disappointment, as strong performance is usually followed by periods of underperformance."
The caveat further states that investors are "better off avoiding a flavor of the month" and sticking with a balanced and diversified portfolio. Even the S&P 500 Index has just 9% of its assets devoted to energy stocks and for most people that is sufficient, the firm said.
As a tangible example of how quickly the bubble can burst, Brennan pointed to the Internet stocks of the 1990s and the oil sector of the 1980s.