Lately I have been amusing myself by looking back into my radio show archives, with the intention to see how times have changed. Not knowing an answer prior to researching a question is mentally stimulating. This next paragraph was written (by me) nearly 2 years ago:
September 11, 2016, 6:30 A.M. It was 15 years ago the world as we knew it changed forever. At least I wish it were forever. I remember where I was, and if you are old enough to be listening to this show, I’ll pretty much guarantee that you do, too.
What did we learn from this, and what should we learn from the time since? Remembering that the Dow-Jones Industrial Average (DJIA) is currently above 25,000, let’s look back and see:
- On 9/10/2001 the DJIA closed at 9,605
- That was the last number recorded that week, as the market failed to open the next day, and for another week thereafter
- When it did open, the DJIA fell to 8,920, for a drop of over 7%
- On December 19, 2001, a mere 99 days later, the DJIA crossed the 10,000 mark, up about 12% from the Post-9/11 low mark
- A year later, the DJIA was back down to approximately crisis level
- For the next 4 years, the index was higher every 9/11 than the year before
- Then came the 2007 financial crisis, and the DJIA dipped all the way down to the mid-6,000s
- In March of 2009 the index started to recover
- Now, we are up over 150% from there, despite the recent correction (remember, this was written in 2016)
That was less than 2 years ago, and look at the market now! The point I am trying to make is easy; stay in the market for the long haul, and you should be fine. However, following that advice is not necessarily as easy as giving that advice, though history shows this to be true. Reacting to short-term events has never been profitable in the long run. Based on history, our capitalistic system fosters a strong and growing economy.
Today, with the DJIA having crossed over the 25,000 mark once again, we are still below the market high of early 2018, but those highs seem to be once again in sight. Faring even better is the NASDAQ, which is currently reaching new highs. Yet, if you pay attention to the various news media, you might think that our country is in a world of hurt.
Back in 2009, I did a radio piece entitled, “Consider the Source.” Things you hear are sourced by people who have varied agendas. Some are pushing a political point of view, others are selling newsletters, and still others may be hawking annuities. These people often use Fear and Greed to drive short-term news cycles, but the markets are affected in the long-term by economics.
Getting a dose of unbiased news through our radio show each and every week can help stabilize the urges we sometimes get to react to fear and greed. Investing with consistency and rational observations of what is going on in the economy has always paid dividends. It was true then, and it remains true today.
Listen to the Van Wie Financial Hour every Saturday morning at 10 AM on WBOB in the Jacksonville market, or through your computer or mobile device on TuneIn Radio.
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The Dow Jones Industrial Average is probably the best known index for tracking the United States stock market. The purpose of the index is to represent the United States economy by tracking the 30 largest companies based in the US. When it was first created it followed companies that were considered to be the backbone of the US economy. This sounds logical at first glance because the success of the largest companies in the US somewhat represent the success of the US economy. However, there are a few things about the Dow Jones that make it less than a perfect representation, and dare we say it, an irrelevant index.
The first issue is that the companies in the Dow may be based in the United States, but many of them make a good portion of their profits overseas. This wouldn’t be an issue if the Dow Jones was meant to represent the worldwide economy, but it isn’t. The Dow intends to represent the United States economy, and companies like Coca-Cola and McDonalds are misleading as much of their profits come from outside the United States.
The next issue, and the biggest, is how Dow index is calculated. The weight each company has on the index is based on stock price rather than market cap. To clarify, the stock price is the value of a single share of stock on the market. The market cap, or market value, is the stock price times the number of shares outstanding. This is an issue. Let’s say Company A has 100,000 outstanding shares at $100 each. The market value of Company A is then $10 million. Now, Company B has 1 million shares at $50 each. Because of that stock price, Company A has twice as much weight in the Dow than Company B, but Company B is valued at $50 million while Company A is only valued at $10 million. Due to this price weighted index, the smaller company’s movement in stock price is going to affect the index more than the larger companies!
The Dow Jones Industrial Average is a valuable index when looking at the market, but only when compared to a base value. As of 6/1/2018 Boeing has the highest stock price on the DJIA priced at $353.04 with 583 million shares outstanding. This represents a market value of 205.7 billion dollars. If the stock price increases by 10% the Dow will increase by about 1%. Cisco, another Dow component, has a market value of $205.8 billion, but a stock price of only $42.72, due to its 4.8 billion outstanding shares. If this stock price were to increase by 10%, the Dow would only increase 12 basis points. These companies are almost the exact same size, but since the Dow is a price-weighted index, the larger priced stock has a significantly greater effect.
Now what would happen if we took the company with the greatest market value and increased its stock price by 10%? Apple has the greatest market value at $948.6 billion but the stock price is only at $186.96. A 10% move would only increase the Dow by 53 basis points. For a company that is more than twice as large to have half the effect on the index is proof enough that the Dow is a flawed index.
Everyone has an all-time favorite movie. Although it may be a difficult selection, the one that has withstood the test of time for me is Casablanca. I first saw it in the late 1960’s as the free movie on the University of Wisconsin campus in Madison. Being a financially struggling UW student in the 1960s and 1970s had a few benefits.
If this seems like a strange opening for a financial blog, stay with me. This is being written in response to Friday’s release of the monthly job creation reports by the Bureau of Labor Statistics (www.bls.gov). To paraphrase Claude Rains (police chief “Louis” in Casablanca,) people were “Shocked, SHOCKED” to find such great job creation going on here in the USA.
So it goes, it seems, every month of the current Administration, when economic numbers have generally blown away the estimates of the “experts.” These so-called experts seem truly surprised by the numbers, whether for new jobs, unemployment, GDP, Consumer Confidence, etc. Why aren’t these economic and media “know-it-alls” expecting good numbers? Could the explanation be as simple as to say that they are letting their politics get in the way of reality? (That is basically a rhetorical question.)
For decades I have complained that our educational system has excluded several important fundamentals. One of the casualties has been basic economics, which is critical to good decision-making in everyday life. The resulting informational vacuum presents itself in the mainstream media on a consistent basis.
Since the election of 2016, in which an outsider (“non-swamp dweller”) was elected President, the US economy has flourished. Of course, it has! Anyone trained in classical economics understands that cutting taxes, deregulating businesses, and equalizing international trade is a formula for success. The under-educated and politically-biased media simply do not seem to understand. Or, it may be that they simply don’t care to understand.
There is a large segment of American society who seem to stay willfully ignorant. Data and information that doesn’t fit their narrative is ignored if possible, or acknowledged with exaggerated surprise if not.
That needs to change for people who want to be successful investors. Since the preponderance of data and information we receive is incomplete or downright inaccurate, every investor bears his or her own burden of responsibility.
Bringing the point home to investors is really pretty simple. Markets are primarily driven by business conditions in the country. Investors who ignore the facts do so at their own peril. Seasoned citizens probably recognize the current parameters of economic health from prior periods of prosperity, including the Reagan era. Today’s economics, including job creation, should come as no surprise. Politics, meet economics. Investments, meet prosperity.
If President Trump is a fan of Casablanca, he might say, “Louis, I think this is the beginning of a beautiful friendship.” America, welcome to escalating prosperity. It surprises us not at all. Always remain skeptical of the motives in the media, and you will be happier and more prosperous. Instead, listen to the Van Wie Financial Hour for a better understanding of why prosperity has returned to the USA.
One final note – How good is it out there? It is so good that the New York Times (no friend of this Administration) actually published this sub-headline regarding the job market; “We Ran Out of Words To Describe How Good It Is.”
Van Wie Financial is fee-only. For a reason.
On a recent Van Wie Financial Hour, and also in a recent Blog, we have discussed the topic of small business financing for startup and growth. Years ago, money was plentiful, entrepreneurs were able to fund their startups from individuals or local banks, and regulations favored growth and expansion for small businesses. Over time, regulations have become more onerous, startups diminished, and a large portion of entrepreneurial spirit has gone unsatisfied. Such a shame, I believe, as evidenced by statistics showing that for the past few years, business failures actually exceeded startups.
How many times have we heard the term, “The New Normal?” Do you accept that? I do not. Stifling an economy through increased taxation and regulation has only two possible results; economic stagnation, and/or recession. In recent decades, we have experienced both. It has become a pervasive and universal problem. In my opinion, it can be attributed to a simple cause; too much government.
President Trump campaigned on a simple economic premise; deregulating and reducing taxes on the business community. We are well into year two of implementing those concepts, and the results are clear. It works every time it is tried.
Everyone knows the adage, most often attributed to Albert Einstein, that insanity is doing the same thing over and over, while expecting different results. Nowhere is this more applicable than in government regulation. Financially, regulation is a strangler of economic activity. More regulation makes things worse, not better.
Why, then, do so many people believe that cutting taxes and reducing regulation will not lead to economic growth and prosperity? After all, every time it was tried, growth and prosperity resulted. Yet resistance is commonplace and widespread. It has taken a Washington outsider (Trump) to revive the basic concepts of economic growth.
The numbers are coming in; it is working. Economic growth is accelerating, unemployment is dropping to record low levels, and tax revenue is rising, reflecting increased economic activity. In short, America is once again prospering.
This past week, a giant step was quietly taken by the Administration to further deregulate financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress in a knee-jerk reaction to the financial crisis of the prior decade. President Trump signed an easing of this onerous law last Thursday. The result will be added prosperity, brought about largely by the ability of local financial institutions to finance business startups and growth. While a total repeal of Dodd-Frank would be helpful, this is a good start. The Administration is promising further rollbacks in Dodd-Frank-based regulations.
As Americans, we remember tax cuts, and we remember deregulation. We also remember the prosperity that ensued. We are currently enjoying the results of the current Administration’s policies. Help for small business, job growth, and economic prosperity is on the way.
Van Wie Financial is fee-only. For a reason.
Have you ever stopped to consider the amount of time, energy, and, yes, even intelligence, that is expended every day around the world with the sole intent to scam someone out of money or property? Further, have you ever considered how productive those resources could be if redirected to a positive goal? Wishful thinking. Period.
We have reported on hundreds of scams over the years, but they rarely directly affect people we actually know. That changed (again) this past week, when I was notified that a scammer had attempted to write a large check against our own personal Home Equity Line of Credit (HELOC). Fortunately, in this case the financial institution was alert, noticed an unusual spending pattern, and contacted me immediately. We were able to immediately stop the transaction from clearing our account.
Where do scammers get the information, and how do they apply it to their sinister plans? We would all be foolish to believe that most of our personal data is not available to a dedicated scammer. Remember the recent data breaches everywhere from the Internal Revenue Service (IRS) to the credit card companies, and even to the credit monitoring companies? Hundreds of millions of confidential data bits are now in the wrong hands.
No one can stop every possible hack, but we are constantly reporting on methods everyone can use to protect themselves. For people in Florida, Georgia, and Washington, D.C., IRS offers a free Security PIN Number for anyone who asks for one. This PIN number will be required every time the taxpayer communicates with IRS. We have used one for a long time. We know many people who have been victims of identity theft at IRS. Restoring your identity is a long, painful process, and a Security PIN will prevent the problem from ever happening at IRS.
This week’s problem was with my credit union, and involved using information that would be difficult to obtain. A bogus check was printed and written as payment to a “contractor,” then presented for deposit at another financial institution. The account information was almost perfectly printed, and would easily have passed a cursory perusal. Also, my signature had obviously been studied and copied, and while imperfect, it would have passed a quick look. Figuring out what methods were used to create the check is a topic for law enforcement. Our reporting is aimed at helping our readers and listeners prevent similar breaches in their accounts.
As with IRS, we have learned that local financial institutions will also allow Security PINS, in the form of security Code Words. These are words that are required to transact business in your accounts. If you have open credit or significant cash at a financial institution, why not establish this simple security procedure?
We have been impressed with the professionalism shown by our credit union. It is comforting to know that they are monitoring and can ask pertinent questions in a timely manner. However, as an old saying goes, “An ounce of prevention is worth a pound of cure.” Taking preventive action may not be 100% effective, but it is better than what most people have now. And it won’t cost you anything to take these simple actions.
I am proof that security breaches and financial fraud can happen to anyone. Be vigilant and protect yourself.
Van Wie Financial is fee-only. For a reason.
For many people, the biggest hurdle to saving is getting started. Looking at a zero balance and trying to picture how that could become a much bigger number can be a huge obstacle. No matter where you are financially, there is usually a lot of concern and self-doubt around saving; whether it’s how much you can afford to save, if you need to save more, if your savings invested properly, if you’ve saved enough, or if it’s going to last.
Recently, there was massive backlash on Twitter after an article ran on Marketwatch stating that you should have twice your yearly income saved by the time you are 35. The reasons given ranged from emotional to completely ridiculous. This backlash got us thinking about the practicality of this advice. Was this goal even possible, and what would it actually take to accomplish it? As Certified Financial Planners™, we felt that we were in a position to answer this question with some solid analysis. We wanted to take a look at what it would actually cost, per month, to accomplish this goal.
Yes, twice your yearly salary sounds like a lot, especially when you are thinking about how much you are saving – or how little you are saving – now. If it sounds overwhelming, don’t worry, you’re not alone. You are with thousands of others who read the article and said that there is no way this could happen. We have some good news for you.
Let’s take a newly graduated 22-year-old, we’ll call her Jenny. Jenny is just starting out and has landed an entry-level position in her degree field with a $25,000/year salary. She even has a guaranteed annual raise of 2% if she passes all her quarterly evaluations. She’s super excited and wants to start saving immediately to reach the twice her salary goal by 35. Jenny doesn’t know much about the different savings vehicles there are out there so she just transfers money from her checking account into her savings account each month. To have twice the salary that she will have at 35 in her savings account (assuming she gets all of her 2% annual raises), she will need to start by saving $337 of her monthly pay of $2083, which is 16.2% of her income. That only leaves about $1750 for all her monthly expenses! For this exercise, we assumed that her savings account had no rate of return.
Now, let’s say that Jenny knew a little more about investing, so she set up a brokerage account. She invested in a decent balanced mutual fund and was able to generate a return of 6% over those 13 years. With this plan, Jenny was able to reduce the amount she needed to save monthly to $229 per month (in the first year), or about 11% of her salary. That is much better even though it still only leaves about $1850 per month for expenses. Is there a better way for Jenny to save?
As it turns out, Jenny is eligible for her company’s 401(k) program, and the company matches 50% up to the participant’s first 6% contributed. If Jenny takes advantage of this 401(k) match, she only has to put in about 8% of her salary, or $167 per month (in the first year), to reach her goal! This leaves Jenny with $1917 per month to cover her expenses, or $167 more than just putting the money into a savings account.
There are other benefits to utilizing a 401(k) plan, including the tax deduction and the fact that the money is deducted from your paycheck, meaning you won’t even have the opportunity to spend it. The truth is, saving for retirement is hard, and it takes discipline and sacrifice to accomplish it. However, setting goals, planning, and taking advantage of all the programs available to you can greatly increase your chances of success
Adam recently volunteered to man the phone bank for Wi$e Money Week, an event put on by the local non-profit Family Foundations. During the phone bank, Adam was interviewed by Channel 4 about a variety of topics.