The Dow is falling! The Dow is falling!

The obsession with the Dow Jones Index is ridiculous, much like Chicken Little's gloom and doom view about the sky and it's trajectory. The media loves to spout off reports "on the 10" regarding its every movement: "Up 2.. down 288...big gain of 100... big loss of 220..."

The wave of numbers is never ending. And it's quite common to get the movement without the total number. If the Dow Jones was 100 and it lost 50, this would be a major movement. But if it's at 10,000 and loses 50, not so interesting.

More importantly, the Dow Jones is a poorly constructed index. It is based on the trading

prices of the 30 included companies. 30. Thirty. Hardly representative of the US stock market! Five hundred companies. Furthermore, the companies trading at higher prices have a greater relative effect on its performance. Regardless of the number of shares outstanding.

A better index for measuring US stock performance is the S&P 500. It is comprised of the largest 500 equities and is based on market cap weights. This means companies are given weight based on how many shares are outstanding -- not the trading price.

The media's not too interested in delving into the S&P -- it is trading somewhere around 900 these days (versus the Dow in the 8,000 range) so the reported numbers are smaller and therefore much less interesting.

Making Money

With investing, the amount of money you make is your return -- i.e., your personal ROI or return on investment. When looking at your portfolio over a specific period of time, your amount of gain or loss constitutes your rate of return. It's rather obvious that we all want a higher rate of return. What may not be obvious are some of the factors affecting your actual or net rate of return:

1. Defining that period - some of us are as obsessed with our return fluctuations as we are with our weight. The majority of us don't need to look at our investments, especially those set aside for retirement, much more often than once or twice a year to monitor and rebalance. That's because the best practice is set a strategy of buy and hold. Daily Dow Jones fluctuations make for talking head fodder and not much else. (In next week's post I'll explain why the Dow is not even a good index.)

2. Factor in expenses - this is one of the primary reasons I'm an index fund lover. If your overall rate of return was 10% but your asset manager charged you 3%, you actually only booked a 7% gain. And if you're holding a taxable (i.e., not a retirement account), any trading you do increases this number as well. Yet another reason to buy and hold. (If you don't believe me, have you ever heard of a guy, Warren Buffet?)

3. Account for inflation - From the example above, the 7% return is truly 5% if inflation rose 2% during the year.

4. Benchmark - it's important to define your benchmark so you have something against to gauge your success. A 10% return sounds great, but if your benchmark index returned 15%, you're actually lagging. The beauty of index funds is that the index itself becomes the benchmark. Since you're guaranteed to perform as the index does net a small fee, you'll always be on benchmark.

WINE PAIRING: For some reason a rosé just seems to have a fantastic rate of return. They're rarely more than $20, many between $10-15, and offer a refreshing bang for your buck. I associate rosé with warm days, sunsets and fresh flavors. They're best enjoyed chilled, outside and with some nibbles like olives, nuts and Parmesan cheese. There are some absolutely delicious Spanish rosés, typically made from Garnacha (Grenache). Try one!

TVM: Key Concept in Finance

TVM stands for time value of money. It is a basic finance principle stating that a present amount of money is worth more now than it will be in the future. My economics professor often used the following expression: "One dollar today is worth more than one dollar tomorrow."

The reason for the TVM is because the money you hold today has the ability to earn interest. You'd rather receive that dollar today so that you could put it in an interest bearing account and let it grow. For example, I receive $100 dollars and deposit it into a savings account earning four percent interest. A year from now, I'll have $104. So given the choice between receiving $100 today or a year from now, I definitely want it today!

Extra credit: TVM explanations like the one above are often simplified and do not take into account inflation or deflation. If, in the above example, inflation were also four percent, it would intensify the TVM concept because the $100 received in the future would actually only be worth $96.

Wine pairing: TVM can be a funky concept, so try something really different, like a Pinotage from South Africa. Pinotage is a cross between the grapes Cinsault and Pinot Noir, and often has gamey and earthy aromas and flavors mixed with bright cherry fruit. Some more available brands are Fleur du Cap, Fairview and Ken Forrester.