Investing

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.

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.

Retirement Wisdom From An Expert

July 20, 2016 By Twila Van Leer

Expert advice for successful retirement.

If anyone knows how successful retirement works, it’s Warren Buffet. Over a lifetime he has become a hallmark of profitable market investment. A recent article in The AARP Magazine shares 10 keys to his success.

Keep A Cash Reserve

Keep a reserve of cash for emergencies and for unexpected opportunities. A rainy-day provision is essential, especially as retirement looms. The end of a regular paycheck means changes in cash needs. Now you must rely on Social Security and whatever other nest egg provisions you have made over your work career. Embellish your emergency fund to take care of any financial challenges. Tap the fund to respond to lucrative investment opportunities.

Invest In Companies That Provide Essentials

Boring companies don’t get any attention at parties, but you may find that there are great long-term returns from companies in more mundane industries. You may think, for instance, that toilet paper, baby diapers and soap are not exciting investments, but Buffett has successfully invested in Procter & Gamble, which has become a world leader in this market segment. Those who put $1,000 into P&G stock in 1986 and reinvested their returns would have more than $32,000 to show for it today. Boring companies who become tops in their industry niche often provide better rewards to shareholders than attention-grabbing upstarts.

How Effective Is The Brand?

Brand loyalty is something to look for in wise investments. Loyal customers will pay more for a product they like. Coca Cola is an example. The logo is known around the world, making it the third most valuable global brand in 2015. Its initial success as a soda drink has financed its expansion into other marketing areas. Invest in strong brands to get larger returns.

Look For Good Fund Managers

Good management is a keynote of successful businesses. Buffett notes that most companies eventually have to survive a bad manager, but when there is a great leader, the company prospers. He points to the outstanding examples of Bill Gates at Microsoft, Steve Jobs at Apple and Jeff Bezos at Amazon. A great manager and a strong business model is an unbeatable combination.

Learn From Your Mistakes

Avoid mistakes, but learn from them. Even Buffett admits to investing mistakes. He experienced a loss of about $450 million in a Tesco investment when the company fell afoul of accounting problems. When such things happen, the best way to recoup is to study what went wrong. Search out the warning signs, suck up the loss and use the information to avoid further market losses. Keep a record of mistakes and they’ll be a guide to better investing.

Stick With What You Know

Stick with what you know. The investment market is huge and intimidating, but Buffett believes you can succeed without being an expert. He avoided the technology revolution in the 1990s and so did not lose big in the tech bust that followed. If you are more familiar with particular areas of the market, put your money there.

Increase Your Buying Power

Look for what will increase your buying power over time. Investments that produce consistent income and steady growth are best. In 2011, Buffett looked at gold as an example of a non-income producing asset, overshadowed by such investment opportunities as croplands and petroleum companies. Retirees benefit in particular from income-producing investments that keep up or hopefully exceed inflation and that provide sustained purchasing power.

Buy At The Right Price

Don’t overpay. Even if a company is successful, a share price that is too high is a bad investment. Wait until an industry has settled before investing. Buffett waited on investing in energy companies until stock prices plunged after the decline in oil and natural gas prices. Make a watch list of interesting stocks and see if valuations fall to more suitable levels. Patience is a virtue in the world of investments.

Use A Buy-And-Hold Approach

Don’t make the same decision over and over again. When you are frequently trading, it increases the chances for missteps. The buy-and-hold approach puts more emphasis on what stocks you purchase in the first place. You may not want to hold a stock forever, but minimize the number of decisions you have to make. The more opportunities you allow yourself to make mistakes, the more mistakes you’ll make.

Look For The Spirit Of Innovation

Don’t avoid revolutionary investments. The business world is full of visionary individuals looking for ways to improve things. One for-instance is the forward momentum at General Electric, a long-time leader in world business. The company saw the opportunity for snapping up a leadership role in the wind energy and turbine business and became a pioneer in the renewable energy industry. Look for the spirit of innovation as an indicator of strong investment possibilities.