Investing Basics

Understanding The Dow Index

October 28, 2017 By Twila Van Leer

When the Dow Jones industrial average goes up – or down – is that cause for you to celebrate – or mourn?

The Dow Index

The Dow is considered a symbol of either euphoria or despair for investors. But how much should you pin investing decisions on this fluctuating indicator of the country’s financial status? This summer the Dow hit a record high, for the first time in a year, which is considered a long time in that particular measure. The reasons, according to the gurus, included an economic slump in China and Britain’s vote to leave the European Union.

To put such things in their proper perspective, it might be well to understand the Dow Jones index and what it means to your personal finance efforts.

The index, initiated in May 1896, draws data from 30 big companies, which represent a broad selection of industries. On the list are large banks such as Goldman Sachs and JPMorgan Chase, industrial giants such as Caterpillar, Apple and Walt Disney Co. Of the original members, only General Electric remains.

To put this summer’s high into perspective, it didn’t represent any huge change for the better: just two-tenths of a percent above the previous high. In the six months before it hit the high of May 19, 2015, it hit a record 10 times.

Standard and Poor’s Index

Standard and Poor’s index, by contrast, has 500 members. The two indexes differ in how they value the stocks they track. Relatively small changes in just a few of the Dow stocks can make a difference.

The Dow is price-weighted, while the S&P is market-weighted. Member companies with the largest value on the stock market make the biggest impact on the index. Apple, the most valuable publicly traded company in the world at $531 billion, can move the index more than any other S&P member.

So, when the Dow goes up, what will it do to your funds? Probably very little unless the rise is significant. Don’t get too excited about the headline that says the “Dow is up” until you study more closely to see how much and why. And it’s the S&P average that means the most, since it has nearly 60 times more — $2.1 trillion compared with $36 billion – in its index.

Funds that are managed, which might be where your dollars fit, tend to track S&P more closely.

But for all its flaws, the Dow usually is right in line with the S&P. And the Dow tends to be more well recognized among investors. It offers a great at-a-glimpse of the market. As a gauge, it is safe to say then when the Dow is up, investors are up. When it’s down, they are down. It pays to pay attention.

What Do You Know About Stocks?

October 6, 2017 By Twila Van Leer

If you are beginning to think about investing some of your money in stocks to create a retirement cushion, but don’t have enough information about stocks to start, here’s a quick primer of the basics:

Up front, understand that the stock market can be risky. Fortunes are made and broken every day and you have to be smart enough – or lucky enough – to stay in the positive lane. From the opening bell at 9:30 Eastern Standard Time to closing time at 4 p.m., the U.S. stock markets are in a continuous process of making or breaking investors. Knowing as much as you can is the best protection.

In the earliest days of American history, President Gorge Washington made what proved to be a brilliant move. He appointed Alexander Hamilton first Secretary of the Treasury in 1792. Under Hamilton’s guidance, the first stock exchange was created in Philadelphia in 1792. These small beginnings were the forerunner to today’s New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) both headquartered in New York.

Other cities, like Boston, Chicago, Philadelphia, Denver, San Francisco and Los Angeles have exchanges as well. Major international cities such as London and Tokyo ditto. The United States continues to operate the largest exchanges, but other markets around the world are emerging. More than 600,000 companies’ stocks are publicly traded and billions of shares change hands every day.

The U.S. market is located on Wall Street. There was, in fact, such a wall. It was a 12-foot stockade built by Dutch settlers to protect them from Native American and British attacks.

There actually are two markets: The primary market offers shares for sale to large investors directly from the corporations issuing them. In the secondary market, where most of the investors buy much smaller shares from among the many offerings buy and sell among themselves. In this market, buying and selling takes place without any involvement of the companies who issued the shares.

Though stocks are considered a risky investment option, they have performed better over time than any other type of security, even gold. Most investors find that for long-term real returns you can’t beat the stock market. The shares are easily

The huge variety of stocks being bought and sold every day makes it possible for “small” stock owners to have a diversified portfolio. There is a wealth of information at the fingertips of newcomers to the market. You can track the technical, historical and analytical data for any stock on the list with ease and the data are updated constantly. Stocks are among the easiest assets to liquidate, so when you need cash, you can get it fast. Many investments fall within the “income stocks” category that pay regular dividends. But expect sudden swings where stock values rise or plummet fast. Regardless, the experts stick with their opinions that stocks, over the long haul, offer the best returns for investors. Their advice is to stand pat through the occasional downturn unless there are very cogent reasons to dump a stock.

There are many sources for getting information about the stock market, including the book, “Stock Market 101: A Crash course in Wall Street Investing,” by Michele Cagun.

Stocks can be affected by politics. The market has tended to do better with Democrats in the White House.

Ways To Maximize Investment Earnings

October 4, 2017 By Twila Van Leer

It’s a sad statistic. Barely 8 percent of college students who responded to a survey regarding personal finance management could have received an A for doing it right. And in a 2014 survey among adults, only 18 percent showed top grade knowledge in personal finances.

It isn’t all that hard. One financial expert and University of Chicago professor reduced the basic elements to fit onto an index card.

To help, here are seven steps, compiled by Suzanne Woolley, to get you into the groove and keep you there:

First, save early and automatically. Some companies now enroll new hires directly into the company 401(k) so they are saving automatically. Others wait until the employee opts in on his own. If you can, save up to the maximum allowed by the employer so you get the benefit of their declared match. Many companies start to chip in when the employee savings reach 3 percent of their earnings. The benefit is that the money is withdrawn before you get a chance to see it, so you don’t miss it.

If your company does not offer a 401(k), start a savings account elsewhere, but aim for an automatic withdrawal of funds. Even a small amount, faithfully put aside, will grow over time. Try to find an option that offers the best interest. The idea is simply to make saving a habit.

Second, expect financial emergencies. It’s a rare individual who gets through life without one – or more. Almost half of those surveyed in a Federal Reserve analysis said they couldn’t cover a $400 emergency without selling something or borrowing.. However, experts caution that saving for an emergency should not come before saving for retirement. Do what you must to meet both needs, if it means eating Ramen for awhile. The older you are and the higher your salary, the larger your emergency stashes should be. Emergencies such as job loss, which often means the loss of health care coverage as well, are devastating. You should have enough savings tucked away that you could continue meeting expenses for at least six months if at all possible.

Third, set an asset allocation. It’s an investor’s most important decision. A rule of thumb is that your allocation should equal your age. Consider your risk tolerance and then be aware that you won’t really know what it is until it has been tested. The risk tolerance varies from one individual to the next. The market always holds risks, but a bad market, especially when you are already in retirement, can be disastrous.

Fourth, keep fees low. With the current expectation that future stock market returns will be dampened, the drive to keep fees low is greater than ever. If you are using an adviser who receives fees and commissions if you buy the products he or she recommends, your returns are likely to be at least 1 percentage point lower each year, according to the White House Council of Economic Advisers. The council estimated the cost of conflicted advise on IRA assets at about $17 billion per year. Keeping your investments simple and bypassing the advisers may save you money. Warren Buffet, in an annual publication, advised putting 10 percent of your money into short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. The long-term results will likely be better than those attained under the advice of a high-cost manager, he says.

Fifth, if necessary, use an adviser who is a fiduciary. A clip from Last Week Tonight With John Oliver gives succinct advice: “Financial analyst is just a fancy term that doesn’t actually mean anything.” An adviser who gets a commission on an investment you make at his urging may be looking more to his own return than yours. Ask your potential adviser if he or she is fiduciary. If the answer is “no,” run, the clip advises.

Sixth, spend less than you earn. This basic, common sense advice seems unarguable. But some 23 percent of millennials and 19 percent of GenXers ignore it, spending above their earnings. No wonder they have no emergency fund. The end of every pay period is an emergency. Lifestyle creep – the tendency to spend more as we earn more – is a trap too many mid-lifers fall into. Saving really is easier than paying interest on a loan you have been forced into to take care of an emergency.

Seventh, maximize employee benefits. A career isn’t forever. The working years are when you need to build your retirement accounts. Financial Engines conducted a survey that showed only one in four employees had taken full advantage of their company’s 401(k) benefits. The survey was taken among 4.4 million participants at 533 companies. An average loss of $1,336 was experienced by those who failed to contribute the maximum their 401(k) allowed. That’s about 2.4 percent of annual income. Low salaries and budget constraints are the usual excuse given by employees who fail to make full use of the savings option, but even many employees in the upper reaches of the salary scale don’t do it. Most large companies also provide disability insurance as a benefit. If you choose to pay the premium, the tax-free provision could be big. Watch for changes in your employee benefits, such as the addition of flexible spending accounts, a health savings account or a commuter assistance program. Such perks lower the amount of salary on which you have to pay taxes.

How To Buy Stocks

September 22, 2017 By Twila Van Leer

Now that you’re on your way financially, settled into a business of your own or working at a good job, you might begin thinking about investing, particularly in purchasing stocks.

It’s really a simple process, but there are things you should know as you dive into the market.

It’s as easy as setting up a bank account. Complete an application and choose how you want to fund your stock account. You can mail a check or transfer funds electronically.

You’ll be wise to find a broker to guide you through the maze. If you have to pay a little more at a brokerage that provides high-quality service, do so, especially if you are starting out with little knowledge of the market and how things are done.

Things to consider:

How much money you have for investing. Many online brokers have minimum requirements. How frequently do you plan to trade? Again, different brokers, different rules. Commissions on stock trades range from $5 to 10. Low commission costs are most attractive to investors who expect to place 10 or more trades per month. If you are an infrequent trader, choose a broker who charges inactivity fees.

Consider how much support you will need. You can choose a level of support that accords with how much you know on your own and how much conversation you need – personal telephone conversation, email correspondence, online chats or face-to-face.

Nerdwallet, OptionsHouse and Ameritrade have lists of the best online stock brokers to help you make a choice.

Once your fund is set up, you can start picking stocks. Begin with researching companies with which you are familiar as a consumer. Don’t allow yourself to get bogged down in the daily deluge of market information. Your objective is to find the companies in which you want to become a part owner. Don’t let the anticipation of a return be your only objective. A good, reliable company may pay better dividends over the long haul than a flash-in-the-pan company that is here today, gone tomorrow.

Use the company’s annual report, including the annual letter to shareholders, to get a sense of what you could expect from its stocks. Your broker’s website is the next source of information on an ongoing basis. It will post SEC filings, conference call transcripts, quarterly earnings, etc., etc.

When you feel you have settled on a good company, decide how many shares to buy. It is generally wise to start small so you get a feel for the market. You may want to purchase just one share to “practice” on. Your own ability to absorb the inevitable ups and downs the stocks normally experience may be the guideline you need to determine how far into it you want to get.

A market order indicates that you will buy or sell the stock at the best available market price. Your order will be executed immediately and fully filled if your request is reasonable. Don’t panic when you find that the stock you were buying or selling changes in value at the moment. The market is fluid, with the potential for many changes in a single day.

Be aware that your broker may bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or at a special stated day or time in a week.

Basic Economics Guide Investment Decisions

September 10, 2017 By Twila Van Leer

Investing is directly tied to the state of the economy

You invest money to earn a return. A basic understanding of how the overall economy of the country affects how well your investment will produce that return is helpful in making investment decisions.

“Investing 101,” a basic how-to book on putting your money to work, by Michele Cagan, is designed to help beginners. In the first chapter, she describes the elements of basic economics.

Investing is directly tied to the state of the economy. If consumers are spending money and the economy is growing, that’s a good time to invest. If money isn’t flowing into the basic economy, the returns are likely to be poor.

What makes the economy boom? Consumer spending and corporations prospering generally equal investments growing. Consumer spending, in fact, is the greatest contributor to the gross domestic product that keeps the economy flowing. And consumer spending, in turn, reflects other factors, such as the job market, inflation and others.

Investors who pay attention to the overall state of the economy will be more successful. Those most in the know can look ahead a little and create their investment strategy accordingly.

Today’s economy is enormously complicated and volatile. With 7.5 billion people sharing a world where information is instantaneous and interaction constant, making an educated guess about the economy at any given time is a challenge. Knowing the basics is one way to increase your chances.

Buying and selling are at the root. People buy things they value. Sellers base their prices on the perceived value of their products. Prices fluctuate based on demand. For instance, most Americans are currently paying less for gasoline than they did a few years ago. That’s partly due to complicated international factors that regulate gas production, but also because people are using less. The basic rules of supply and demand apply. If the supply increases, prices fall; if demand increases, prices rise.

Income is a major factor. You receive income from jobs, inheritances, investments, etc. Ideally, individuals learn to live within the income on which they can rely. Life changes can affect your income. For instance, retirement, which can reduce the sources on which you have traditionally relied. Wise saving and investments can help replace the lost work income.

Consumption, or how much of your resources you spend to live, makes a huge difference. If you consume more than you accrue in income, there is trouble ahead. Keeping a balance is the way to avoid debt and other issues.

Savings and investments are vital to meet emergencies and to provide for retirement. In the 1960s, Americans saved 6 to 10 percent of their income. The figure has seriously declined until few Americans have the same cushion. Many have zero resources to fall back on when they need it. Saving some money and, ideally, making it work by wise investing is the solution.