Investing

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.

“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.