MEASURING STOCK MARKET CHANGES

With thousands of stocks traded on the major stock exchanges, measuring daily price movements for all stocks would be a monumental task. Thus, indicators considered representative of the market have been designed to allow investors to track the general trend and current status of the stock market. Two of the most widely cited indicators are the Dow Jones Industrial Average (Dow) and the Standard & Poor’s 500 (S&P 500).

THE DOW

The stocks of 30 companies traded on the New York Stock Exchange (NYSE) are used in the average (see list of companies at end of this article). These stocks account for less than 17% of the total market value of nationally traded stock issues. All of the companies are billion-dollar giants — small and medium sized firms are ignored by the index.

The Dow isn’t calculated as a straight average, which would involve simply adding the prices of all the stocks and dividing by the number of companies included. Instead, adjustments are made for splitting of shares and distributions of stock dividends.

THE S&P 500

The S&P 500 tracks 500 companies traded on the New York Stock Exchange, the American Stock Exchange, and the over-the-counter market. The index is comprised of companies in broad industry groupings in an attempt to mirror the composition of the New York Stock Exchange. In addition to the S&P 500 average, Standard & Poor’s also publishes the component averages that make up the S&P 500 — the 400 industrials, 40 utilities, 20 transportation companies, and 40 financial stocks. The S&P 500 is one of the twelve indicators used to calculate the U.S. Department of Commerce’s index of leading indicators.

The S&P 500 is a market-weighted index, meaning that it factors in the differences in size of the individual stocks by multiplying the price of each by the number of shares outstanding. The resulting market-value figure is then averaged and expressed as a percentage of a base figure.

In order to ensure that the index continues to represent the overall market, changes are often made to the S&P 500, with as many as 25 to 30 changes in a year. These changes have little effect on the overall index, however, since it requires a move of approximately $70 million of market capitalization to move the S&P 500 by one basis point, or 0.01 point.

THE DIFFERENCES

The S&P 500 is generally considered a broader measure of the stock market because it tracks so many different segments. The Dow is heavily comprised of industrial and cyclical industries. Also, since the Dow is an arithmetic average rather than an index, higher-priced stocks have more of an impact on the Dow than less expensive stocks do. Since only 30 stocks are tracked, substantial movement in one stock can significantly impact the average, which may not reflect the overall movement of the stock market.

Following both indicators will give investors some indication of broad-based market moves. These indices can also be used as comparative measures to judge portfolio or mutual fund performance, although the limitations of the indices must be kept in mind. Please call us at 800-878-4036 if you’d like to discuss how to use the indices in more detail.

DOW COMPANIES

(Year in parentheses indicates the company’s first appearance on the Dow.)

Allied-Signal (1925)                        Eastman Kodak (1928)                           J.P. Morgan (1991)

Alum Co.(1959)                             Exxon (1928)                                           Phillip Morris (1985)

American Express(1982)                General Electric (1897)                             Procter & Gamble(1932)

AT&T (1916)                                General Motors (1915) 

Bethlehem Steel (1928)                  Goodyear (1930)                                     Sears Roebuck (1924)

Boeing (1987)                                IBM (1979)                                             Texaco (1916)

Caterpillar (1991)                          International Paper (1901)                         Union Carbide (1928)

Chevron (1924)                             McDonald’s (1985)                                 United Technologies(1933)

Coca-Cola (1987)                         Merck (1979) 

Disney (1991)                               Minn. Mining (1976)                                 Westinghouse (1916)

DuPont (1924)                             Woolworth (1924)

THE NEED FOR A WILL

You’re not alone if you don’t have a will — you’re in the company of over half of all adult Americans (Source: U.S. News & World Report, April 24, 1995). Yet the potential consequences to your estate if you die without a will can be significant:

YOUR STATE DICTATES WHO RECEIVES YOUR ASSETS. In most states, that means that your children will receive one-half to two-thirds of your estate with your spouse receiving the balance. All children will be treated equally, even if you would have preferred to give more to a minor child or to a child with special needs. If you have no children, your assets will normally be split between your spouse and your parents or brothers and sisters. Generally, the way the state will distribute your estate won’t be the way you would have.

YOU ESTATE WON’T BE DISTRIBUTED IN THE MOST TAX-ADVANTAGED MANNER. By deciding who will receive what assets, you can sometimes control the ultimate amount of estate taxes that will be paid.

THE COURT WILL NAME A GUARDIAN FOR MINOR CHILDREN. One of the most significant advantages of a will for couples with minor children is the ability to name guardians. Additionally, you can specify when your child should receive assets or set up a trust for your children until they reach a certain age. Without a will, they will inherit the assets when they turn 18 or 21 (depending on your state of residence) and, until then, the court will appoint someone to control the distribution of those assets.

THE COURT WILL NAME THE EXECUTOR OF YOUR ESTATE. If you don’t specify an executor in your will, the court will name one, usually a professional who may charge a significant fee to your estate.

Even if you settle most of these issues by establishing a living trust or other form of trust, you probably still need a will with a "pour-over" clause requesting that all property not in your trust be put there after death.

There are several items you should consider before preparing your will. Spouses should each have separate wills rather than a joint will, since a joint will could prevent the surviving spouse from changing the distribution of assets. It is usually best to leave percentages of your estate rather than specific dollar amounts, since your estate may grow or shrink significantly over the years. Jointly owned property, such as homes or bank accounts, and items with specific beneficiaries, such as a pension plan or life insurance policy, cannot be disposed of through a will.

Be sure to list contingent beneficiaries in case your selected beneficiaries die or can’t be located. You may want to name a favorite charity as a contingent beneficiary to ensure that your assets can be completely disposed of. In most states, you cannot completely disinherit your spouse unless you have a signed prenuptial or nuptial agreement. Although you can disinherit children, it is usually best to specifically state in your will that you are making no provision for them.

Once you prepare your will, be sure to review it periodically to make sure you are satisfied with the provisions and to ensure that revisions are not needed due to tax law changes. Also review your will if you move to another state or if your financial situation changes.

LIVING ON YOUR NEST EGG

After retirement, you’ll probably need to start withdrawing money from your nest egg to supplement your Social Security and pension benefits. Wondering how much you can withdraw without depleting your savings? The following table shows, for a balance of $100,000, how many years your money will last based on various withdrawal amounts and rates of return. For example, if you want to withdraw $10,000 a year and your funds are earning 8% per year, you’ll be able to make withdrawals for 21 years. If you have more than $100,000, you can still use this table. Simply multiply the annual withdrawal payment by how many times your funds exceed $100,000 and your money will last the same number of years shown in the chart. For example, if you have $250,000, you can multiply the $10,000 withdrawal amount by 2.5. If your funds earn 8% per year, you can make withdrawals of $25,000 for 21 years.

Annual Withdrawal                                            Years $100,000 will last at following rates of return:

$5,000                                                               *          *          *          *       *       *         *         *

6,000                                                                 37        *          *          *       *       *         *         *

7,000                                                                 26        34        *          *       *       *         *         *

8,000                                                                 21        24        31        *       *       *         *         *

9,000                                                                 17        19        23         29    *       *         *         *

10,000                                                               15        16        18         21    27     *          *        *

11,000                                                               13        14        15         17     20    26        *        *

12,000                                                                12        12       13         15     17     19       24      *

13,000                                                                 10       11      12          13     14     16       18      23

14,000                                                                 10       10      11          12      12    14        15      18

15,000                                                                 9           9      10          10      11    12        13      15

16,000                                                                 8           9        9          10      10    11        12       13

17,000                                                                 8           8        8            9        9    10        10      11

18,000                                                                 7           7        8            8        9      9         10      10

19,000                                                                 7           7        7            8        8      8           9         9

20,000                                                                 6           7        7             7        7     8            8          9

* — Will last indefinitely.

This chart is for illustrative purposes only and is not intended to project the performance of any specific investment.

Few parents will argue that it is very expensive to raise a child. According to the U.S. Department of Agriculture, the average amount spent on a child from birth to age 18 is:

                                                                                                            Annual Income                        

Total spent over 18 years                                                                         $32,000-

                                                                                <$32,000                 $54,100                >$54,000

Housing                                                                      $30,540                 $43,020                  $69,780

Food                                                                            19,650                   23,700                    30,270

Transportation                                                              16,530                   23,070                    27,750

Clothing                                                                          9,330                   10,860                    14,370

Health Care                                                                    6,840                     8,460                    10,050

Child care & education                                                   5,790                     9,840                    16,590

Other                                                                             9,030                    13,710                   23,970

Total                                                                            97,710                  132,660                 192,780

NAME A GUARDIAN FOR YOUR CHILDREN IN A WILL. Unless you do so, the courts will appoint a guardian and will also supervise their property if you die. Make sure to discuss this responsibility seriously with your candidate and to select at least one alternative. You may want to consider two guardians — one to take care of the children and one to take care of their property.

PURCHASE SUFFICIENT INSURANCE. Make sure you have enough life insurance to provide for your children until they are adults. Also ensure that you have adequate disability insurance.

START SAVING FOR COLLEGE. Even if you can only start out with small amounts, it is important to start saving early for college.

TEACH YOUR CHILDREN ABOUT MONEY. One of the most valuable lessons you can teach your children is how to save and how to responsibly manage money.

SAVE FOR YOUR RETIREMENT. To ensure that you don’t have to reply on your children for support as you grow older, make sure that you finance an independent retirement for yourself.

GIFTS ASSETS TO YOUR CHILDREN. If you are planning to leave your assets to your children, you may want to start making annual gifts during your lifetime. Not only does this reduce the value of your estate, but it allows you to help your children use the money wisely and to share in the joy the children receive from the gifts.

CALL FOR HELP WITH THESE DECISIONS. The financial responsibilities of a child are often overwhelming. Call us at (800) 878-4036 if you’d like assistance with these decisions.

NEWS AND ANNOUNCEMENTS

Are you making significant progress toward your financial goals? If not, is it because you are guilty of making one or more of these common financial mistakes?

PROCRASTINATION — Confused by the complicated process of financial planning and the vast number of investment alternatives, many people react simply doing nothing. You can always adjust your plan later — the important thing is to get started now.

NOT SAVING ON A REGULAR BASIS — Don’t get trapped into believing that you don’t make enough money or that you have too much debt to start saving for your financial goals. Even if you start out by saving very small amounts, it is important to make saving a habit.

NOT INVESTING YOUR SAVINGS — While saving is very important, so is investing those savings.

LOSING PATIENCE — Some people, seeing minimal progress in the first couple of years, are tempted to abandon their plan. But it often takes years to see significant results.

INVESTING IN LAST YEAR’S HOT INVESTMENT — Don’t simply invest in last year’s star performer, be it a specific stock, mutual fund, or investment category. In addition to past performance, it is important to understand the fundamentals of an investment and to consider its prospects for the future.

NOT DIVERSIFYING — Diversification can play an important role in reducing the risks in your portfolio. Since different investments are affected differently by economic events and market factors, owning different types of investments reduces the chances that your entire portfolio will be adversely affected by a particular type of risk.

NOT MONITORING YOUR INVESTMENTS — Although buying and holding for the long term is often a wise investment strategy, you must review your investments on a periodic basis.

INVESTING SOLELY FOR TAX REASONS — In their zeal to reduce taxes, some people invest in vehicles that aren’t appropriate.

Don’t let fear of making mistakes prevent you from achieving your financial goals. Resolve to get your financial affairs in order now. It is a complicated process, so feel free to call us at (800) 878-4036 for help.