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.

The Economy is not the Market

I hear a lot of people confusing the U.S. economy with the U.S. stock market. For example, two gentlemen at my gym were talking and one said, "The economy sure is unstable with these 200 point gains and losses." The other responded, "Yes, I sure wish it would recover." To a finance geek like myself, this conversation is part funny (ha, ha, he thinks the economy is the market)and part scary (so do a lot of people).

The economy is a broad collection of factors related to the production of goods and services. Its health is typically measured by economic growth (or recession) numbers, which by the way, tend to be backward looking. When measuring the real economic growth rate, we're looking at the nation's GDP (gross domestic product) from one period to another. GDP is made of of consumption (C), government spending (G), investments (I) and net exports (exports minus imports, NX). In fact, G=C+G+I-NX. (Note that I should not be confused with the stock market -- it is the measure of business spending on capital.)

The stock market is made of up of shares of publicly traded companies -- i.e., those who have sold stock to finance their businesses. The return for investing in companies is return on the investment, or the share price rising due to higher valuation. There are many different markets -- for example, based on company size (i.e., Nasdaq for smaller) or nation (Tokyo exchange). The stock market is not a measure of the economy. Stocks can do poorly in times of economic growth and well in recessions.

Wine Pairing: try a Semillon with mussels and then a Syrah with lamb. They're both very different pairings. Remember this next time you're about to confuse the economy with the market!

Save on Travel Costs

Ever since I planned a high school senior year Spring Break trip to... you guessed it, Cancun, I've been obsessed with deals on travel. In March of 1996, our group paid $700 each for round trip airfare, rooms at the Cancun Palace, and all inclusive food and beverage. While that charter flight was not the most professional or timely, the package included alcohol, so we basically flew and stayed for free!

While what constitutes a vacation for me has certainly changed in the last 13 years, the booking principles are the same: shop around and book in advance. There are of course last minute deals to be found, which is great if your travel plans are flexible, but for the purposes of this post I'm assuming they're not. (I did once book a $1300 week-long trip to St. Martin on Expedia 10 days before I left that included airfare from SFO and lodging.)

The first step is to plan your trip budget. Then how you will you spend it. Are you happier eating fabulous meals and staying in a less-than-stellar hotel? Or do you prefer upscale accommodation and like to bring take out to your room? Will you be in a place like the beach where you won't spend much time in your room, or does the property and/or location matter? What will you need? Does an apartment or home rental make sense, or is the best bet a hotel.

After you've answered these questions, you're ready to use Google to find a deal. Google might lead you directly to a booking site, or perhaps to a rental property manager. When getting price quotes, be sure to ask when payment is due, what the deposit amount is, and what extra (hidden) fees there might be. Be up front about your lodging budget -- i.e., help them help you.

If your trip requires airfare, my favorite site is Kayak. Here you can compare deals on all flights available and specify time windows. You can also set up a travel "alert" if you travel frequently to a particular area -- for example, I have one set up between Portland, OR and Oakland, CA since I'm often en route to California for work. The one thing to note is that Southwest Airlines does not display, so I advise you to check the airline site directly to see its rates as well.

If your trip is bringing you to a particular city, check out its associated travel and tourism site. For example, this site has fantastic deals in the Portland area. There are pre-pay hotel discounts that include parking, breakfast and a $75 gift card. The packages change but the idea is the same -- take advantage of deals designed to lure tourism. If there are particular sites or museums you want to visit, chances are there will be coupons included, and you can always ask.

Travel can be fun and exotic, just like a Chilean Carménère, which is this post's wine pairing! Carménèreis a "noble variety" in Bordeaux but is almost always a minority part of the blend. In Chile, it is arguably "king". Carménère is a medium-bodied wine with red fruit, spices and softer tannins than in a Cabernet Sauvignon, for example. This Casillero del Diablo is a great value from one of the bigger producers, Concha Y Toro and costs less than $10.

Planning a Wedding: the Budget

Last week I discussed wedding budgeting from the guest's point of view. Today's post is for the engaged or soon-to-be engaged LMF4HMW. According to this site, the average wedding costs roughly $20k, but the happy couple often plans to spend 50% less -- i.e., they go way over budget. You can thank "bliss", "competitive bridezilla moments", "have-to-have-it-don't-care-about-cost" lapses in judgement. And poor financial planning and management, of course.

I advise newly engaged couples to enjoy that engagement bliss before bungee jumping into the wedding planning mode. That's tough to do since everyone's second question (after "How did he propose?") is always, "Have you set a date?". Try it anyway, for at least a month!

Some couples know where they want to get married. Others are more flexible with regards to location. In either circumstance, picking the location is an important first step, as it will affect all other costs. Just as a company would get a few quotes to find out which vendors are competitive, a bride-to-be owes it to herself and her man to seek bids for all major expenses throughout the process. (A great wedding planner can be worth her weight in gold in this arena. Make sure she is really good at budgeting when you interview her!) It is common to need a deposit of up to 50% to hold a location. And so the spending begins. But before you go sending checks, create a budget. Without an overall view of the costs, you're setting yourself up to make poor financial decisions throughout the process.

Spreadsheet savvy types should open Excel and get started; for others a Word doc will do.
A line item for each cost should be inputted in the horizontal rows. Common line items are as follows: location, caterer, alcohol (if not included in the catering charge), decorations; rings, attire, entertainment, photography and videography, invitations, travel costs, honeymoon, civil ceremony costs, and wedding planner.

Other important headings should occupy the vertical columns: vendor name, point person contact information, deposit due date and amount, final payment date and amount, and notes. The beauty of Excel is that you can set up equations to the amounts paid and due, and have these cells give you a total cost.

The point of pulling together a total estimate is to get a reality check. In the bid gathering process, you are gathering information, not making major wedding decisions. Only when you have this information will you be able to choose what items are more or less important together as a couple (versus arguing about it), and create a realistic spending plan. Remember, you're spending against a budget... not adjusting the budget to fit your spending habits.

Next week I'll discuss from where this money will come and how to create it. And tips for saving.
Wine pairing: a bubbly, fresh, citrus-packed Prosecco, an Italian sparkler named for the grape that won't break the wedding budget bank.

How to Avoid Financial Drain from Weddings

So you've been contributing to (and hopefully maxing out) your 401(k), building up that emergency fund and staying out of credit card debt. Summer is coming, which for many LMF4HMW is"wedding season". Which means some serious cash outlays.

In addition to being fun celebrations, weddings can be a serious drain on your financial pockets. For attendees, there are travel costs, gifts to buy, bridesmaid frocks, shoes, jewelry and other items. For the person(s) paying, it's often an incredible investment -- the average wedding budget is $20,000. So either the the bride and groom or the family of the bride (becoming less common) are in need of some serious budgeting and financial planning.

In today's post, I'll cover the topic from the vantage point of a guest; next week I'll discuss planning and budgeting for your own wedding. (I've attended 30+ weddings in the last 8 years and paid for mine a year ago, so I know a fair amount about them.)

Between 2005-2007, I attended over 20 weddings, two of which were international! I figure I spent an average of $1000+ on each to pay for travel, gifts, and gear (you know, the bridesmaid dresses you'll never again wear). So this amounted to $20,000 in a two year period. Just for comparison sake, had I put this cash into an index fund with a 6% annual return, by 2027 I'd be sitting on $64,000.

The above figure is not mean to scare you or suggest that you stop attending weddings. (I obviously chose to spend the money on good times.) I'm simply stating the real cost of attendance. Each LMF4HMW reader will have her own set of needs and goals. The point is to approach being a wedding guest like you would smart financial planning. Know your costs, have a goal and budget, and spend wisely.

Whether or not to attend a wedding depends on a number of factors, including how close you are with the bride and groom, distance and associated travel costs, the total number of invites you receive, and of course, your particular financial situation. If you divorce yourself from the personal relationship, going into debt to attend a wedding just doesn't make sense. Sometimes, this isn't possible, so if you're going to finance wedding attendance with a credit card, just be sure to have a pay off plan. And consider this within the context of all of your other expenditures and income in that year.

Even if you do decide to attend, think about ways to cut costs. It seems that brides these days have an engagement party, shower, bachelorette party, and a wedding. Not to mention gift registries for all of them. Only a bridezilla would expect you to attend and gift for all of these, so perhaps pick the most important event if attending all of them doesn't make sense. (And if you get any grief, perhaps you should perform a friend reality check.)

If all events are local and do not require travel costs, maybe decide to buy one nicer gift and let the bride and groom know your intention. The important thing is to consider everything in context versus just saying "yes" to all and buying gifts for every occasion without adding up what you're truly spending.

To mitigate my wedding attendee costs, I did one main thing: I did not attend any bachelorette celebrations.

I'm sure there were friends who were offended or miffed that I didn't make their bachelorette parties, but I just didn't think about it. (Brides tend to get a little wrapped up in themselves so I chalked it up to "me" focus and figured it would pass.) Attending all of them would have required an average outlay of an additional $1000+ dollars for each bride. (This would have doubled the cost to attend and made my investment comparison figure $128,000!) With the number of weddings I was in and attending, it just didn't make financial sense. Period. I made it "fair" by applying my no-bachelorettes policy consistently and gently let the bride know that I was saving to attend her wedding.

The above represented my biggest cost savings. I also booked travel in advance through sites like Kayak.com and Priceline.com and avoided attending associated wedding events that weren't local. For example, if a shower was in another city, I stayed put.

Your wedding attendee situation may differ from mine -- if you live in your hometown and all events are local, participating in more of them may not substantially drive up your costs. The main point of the post is to consider the full contextual cost of attending a wedding and make sure you don't go into debt to get there!