How to Look Really Smart in Front of Your Friends

by Ryan Law

As you’re driving home in the evening or watching the news you probably hear the reporter say something like, “The Dow closed up a fraction to finish up the day at 12,988 while the S&P lost 12 points to finish up at 1370 and the Nasdaq advanced 12 points to finish at 2971.” As they are saying that do you know what they are talking about? If not, after today you can look smart in front of your friends and say something like “Wow – I expected the Dow to peak over 13,000 today – it did earlier in the week. I imagine it will do that soon, though. I really should call my broker in the morning. What do you guys think?”*

What are stock market indexes?

The Dow, S&P 500, Nasdaq – what does it all mean?

Each of these represents a group of stocks, or in other words, they represent companies. They are meant to represent either how the overall stock market is doing or how a certain segment of the market is doing.

Here are five of the most common indexes you might hear about:

Dow Jones Industrial Average (also called the Dow, Dow Jones, the Dow 30, DJIA): The Dow was created in 1896 by Charles Dow (hence the name – the “Jones” part came from Dow’s friend and business associate, Edward Jones). The Dow has 30 stocks in it, all of which are major corporations in the global economy and most of which you will know – names like 3M, Coca-Cola, Wal-Mart, IBM, Disney and Chevron. These companies do change occasionally – for example in 2008 Kraft replaced AIG. GE has been the longest one on the index. For the full list see the Wikipedia article in sources, below.

Standard & Poor’s 500 (also called S&P 500): The S&P 500 was created in 1957 and contains 500 stocks, which represent the 500 largest companies in the United States and 75% of the stock market (there are a few non-US companies, but just a handful). For this reason it is, along with the Dow, the most widely quoted and compared stock index. A lot of people see how well their portfolio did in comparison to the S&P 500. To fill up space in this article, I am going to list all 500 companies below (just kidding! If you want to see the full list, see the S&P link below).

Nasdaq: The Nasdaq is actually a stock exchange, rather than an index, but it is often reported as an index. It was founded in 1971, and there are about 2700 stocks traded on the Nasdaq. While the Nasdaq has a variety of stocks, it is often seen as being representative of technology stocks.

Wilshire 5000: If you were on a game show and they asked you how many stocks are in the Wilshire 5000 you might be tempted to answer 5000, but you would be wrong and might just lose the game show because of it. Since you read this, though, you will know it is a trick question – there are actually about 4100 stocks in it (to be fair, when it started in 1974 it did have closer to 5000 stocks). The Wilshire 5000 is intended to cover most publicly-traded companies that are headquartered in the United States. Because it is larger it gives a broader measure of the overall US market and includes a number of medium and smaller sized companies.

MCSI World: MCSI has 1600 stocks from developed countries all over the world and is often used as a benchmark for how the global stock market is doing.

What do the numbers mean?

When the news reporter says the Dow was up 12 points, what does that mean? Look at it this way – if you had an index made up of 5 stocks that were worth $100 today, and tomorrow it was worth $110, it went up $10, or 10%, so you would say “My index went up 10 points today to close at 110.” The next day if it went down to $103, you would say “My index went down 7 points today and closed at 103.” You’re still up 3% overall, though, from the original date.

That’s an oversimplified example, but it gives you the basic idea. Different indexes use different formulas, but remember this rule of thumb: If the numbers go up and you have investments similar to the index, you should have made money that day.

Great – sign me up!

Now you know all about indexes so you want to invest in one? Well, too bad, you can’t invest directly in an index. After all, it’s simply a number that represents the underlying stocks. There is good news, though – you don’t have to go out and research which 4100 stocks are in the Wilshire 5000 and purchase them yourself. That would get expensive and time-consuming. There are mutual funds that have created index tracking funds, and there are also stocks that are traded on the stock exchanges that also follow a certain index. If you want to follow the S&P 500, for example, instead of you purchasing the stocks you purchase shares of a mutual fund, and then they combine your money with a bunch of other investors and buy the 500 stocks. A number of mutual fund companies sell index tracking funds, including Vanguard, T. Rowe Price and Fidelity.

I hope that you have learned something today and that on your drive home you will tune in when the reporter talks about the stock market. Really, though, it’s all about looking smart in front of your friends!

Sources and Further Reading:

Dow:
http://www.djaverages.com/?go=industrial-overview
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

S&P:
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
http://en.wikipedia.org/wiki/S%26P_500
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Nasdaq:
http://en.wikipedia.org/wiki/Nasdaq
http://www.nasdaq.com/

Wilshire 5000:
http://en.wikipedia.org/wiki/Wilshire_5000
http://www.wilshire.com/Default.aspx

MCSI World:
http://en.wikipedia.org/wiki/MSCI_World
http://www.msci.com/

*If one of your friends says that you could come back with “Well, yes, but the housing market is still flat and interest rates are poised to stay low for at least the next year, according to Bernanke, so I think it still might be a little high. I think we will see it hold steady by the end of the fiscal quarter, given the circumstances.”

Is Your Religion Your Financial Destiny?

by Ryan Law

Last year the New York Times[1] published an article titled “Is Your Religion Your Financial Destiny?”. I have come back to this article and discussed it with several people and finally decided to write about it. The graph about speaks for itself, but I have a few comments about it.

First, the graph:

If you have a hard time reading the graph in your e-mail, you can pull up a copy online here:

http://www.nytimes.com/imagepages/2011/05/15/magazine/15-Leonhardt.html?ref=magazine

A couple of notes – the y-axis shows the percentage of households with an annual income above $75,000 in each religion listed. The x-axis shows the percentage of college graduates from each religion listed. For example, among Anglicans/Episcopalians, approximately 52% have an income above $75,000, and about 52% are also college graduates. The national average of all households in America that make over $75,000 is about 30%, while about 27% of all households in America have graduated from college.

On the low end of the graph we have Jehovah’s Witnesses, with less than 20% of households making over $75,000 and less than 10% college graduates, while at the other end about 65% of Hindus make over $75,000 and about 74% have a college education.

As you look at the graph, do you notice a trend? Does it almost look like you could draw a line that would slant up and to the right and hit almost every point? With the exception of a few in the middle, and a slight dip at the end, you almost could draw a straight line. What does this mean?

First, and this is definitely worth noting, religion does seem to have a factor in how much money people make. The study, conducted by the Pew Research Group, shows that religion plays a greater role in predicting your income than the differences among states or even racial groups.

Second, college education and wealth go hand-in-hand, and some religions place a high emphasis on education.

I would be interested to seeing where atheists fit on the graph. We have one titled “unaffiliated religions” but nothing for atheists.