Monday, March 5, 2012

DOW’s 13,000 Rally – Just More Hype

DOW’s 13,000 Rally Just More Hype

Unless you were literally living under a rock last Tuesday, you probably heard the “breaking news”: We’re back, baby! The DOW reached 13K (13,005.21, to be precise). Granted, any sign that our economy is gaining steam is awesome news, but from the way most of the media talking heads and so-called experts covered it, you might easily get the impression that most investors’ recent stock market woes have been completely reversed. Of course, that’s not the case!

Here’s why your nest egg isn’t where you were expecting it to be, vis-à-vis the DOW:

First off, the DOW isn't the best measure of the stock market. Although media accounts may make it seem that way, the DOW follows only 30 (THIRTY) of America’s largest companies. Sure, these are important companies like American Express, Bank of America, Boeing, Chevron, DuPont, Coca-Cola, McDonald’s, AT&T, Walmart, and IBM, but you wouldn’t take the stock prices of just a handful of companies – out of more than 2,000 – as a true proxy for the entire stock market, would you?

Secondly, those numbers you hear about are weighted. Why is this critical? See, the way arithmetic works, all it takes for the DOW to experience a huge jump is a very small change in the price of high-priced stocks. In effect, just a handful of the most expensive stocks carry the most weight. This means that a relatively tiny percentage change in the stock of, say, IBM, which is currently trading at around $198, will swing the DOW much more than a very large change in the stock of Bank of America, which is presently trading at around 8 bucks. Interesting, isn’t it?

Finally – and you might want to pay very close attention – This is not the first time the DOW has clocked 13K. A little less than five years ago, on April 25, 2007, for the first time ever, the DOW closed above 13,000. It kept rising, and would close at 14,164.53 on October 9, 2007. Then, on March 9, 2009 it crashed and closed at 6,547.05.

I don’t know about you, but if my nest egg had experienced that, I wouldn’t be part of last Tuesday’s fanfare because I’d still be in a hole. Let’s do some quick math: Say I had $100,000 on October 9, 2007; it would have been whittled down to just $46,220 by March 9, 2009, only to come back up to $91,811 today (which is still less than the $100,000 I began with almost five years ago).

Of course, every analyst, media outfit, and financial advisor will choose whichever perspective they like. But at the end of the day, shouldn’t your money be growing as the years progress? If that’s true, the recent escalation of the DOW probably doesn’t mean what many people seem to think it means, after all.
Schedule your complimentary appointment today with a financial professional from Laser Financial Group. Explore proven, time-tested ways you can prevent your retirement nest egg from remaining at the whim of the Dow and other market indicators. or 877.656.9111.

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