Dissing the Dow

DowThe Dow Jones Industrial Average is made up of thirty significant stocks ranging from American Express to Walmart.  Created by Charles Dow, who’s firm gave birth to the Wall Street Journal, it is considered a benchmark to keep your eye on.  The Wall Street Journal has a formula for deciding what stocks will be included in the DJIA.  In March of 2015, Apple replaced AT&T.  The question by many was posed:  Could the shift make the DJIA, which previously included more mature, less-volatile companies more susceptible to sharp moves?  According to options-data provider Trade Alert, Apple shares tend to swing almost twice as much as AT&T’s.  Also included in the DJIA are Exxon Mobile which saw a -16.03% loss in 2015 and Chevron with a -20.09% 2015 loss.  Oil prices are down and we smile when we fill our tanks.  While we have more money in our pockets, and companies that use oil to produce products have lower expenses and are reaping the rewards for their stockholders, we are captivated and unnerved by the headlines “DOW is down today”.  Recent one day headlines include “Stocks Extend Drop as Crude Loses Gain; The DOW Drops: Blame Wal-Mart; DOW turns positive for the month as IBM surges”.

Over time, the DJIA has gone up, and was intended to give an overview of general economic health.  People use it as a benchmark to gauge their investment success or failure.  Is it what you should be paying adept attention to and making your investment decisions on?  Is it a good day to day measure of your financial success?  I warrant not.

What benchmarks should you compare your financial portfolio to?  There is the S&P Index which tracks 500 large-cap U.S. stocks.  How about the Russell 2000, which measures approximately 2,000 small cap stocks in the U.S? What of the EMBI (Emerging Markets Bond Index), or the MSCI (Emerging Markets Index)?  Oh, the conundrum of comparison!

What about your personal benchmarks?  How is your array of financial resources doing to help you accomplish what is important to you?  Can we use the idea introduced by Dr. Thayer of the University of Chicago of “mental accounting” to help us succeed?  The idea of dividing your investment strategies into buckets can actually be a positive way to stay unemotional about the day to day, even year to year fluctuations of world markets.

According to Behavioral Portfolio Theory (Shefrin and Statman 2000), we can look at four buckets – Safety, Income, Tactical and Accumulation. The “safety” bucket would be focused on preserving principal and minimizing volatility.  The “Income” bucket would be focused on generating cash flow while limiting volatility.  The “Tactical” bucket would manage volatility while focused on appreciation to accomplish your aspirations. Finally, the “Accumulation” bucket’s purpose is increasing future purchasing power and focuses on potential while accepting a higher degree of risk.

What is in each of these buckets?  From a holistic financial perspective it can be everything from a simple savings account, to equity in your home, business assets, income from work, SS or pensions, or investment portfolios.

Stop comparing yourself to financial benchmarks.  They are obstacles to your success. As Henry Ford noted “Obstacles are those frightful things you see when you take your eyes off the goal”.  Once your goals and dreams are connected with your financial realities, sensible behavior, appropriate asset allocation, and intentionality to your earning, giving, investing and spending decisions are a natural extension of a life well lived.







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