Most days I wake up to KUOW (94.9 FM). Near the top of the hour, the Marketplace update comes on and before they start in with the stories, Kai Ryssdal will say, “But first, let’s do the numbers.” If you’re a regular listener, then you know that what comes next is the reading of the stock market indexes accompanied by “We’re in the Money” if the markets are up, “Stormy Weather” if the markets are down, or “It Don’t Mean a Thing” if the markets are mixed. It’s fun.

But what are all these numbers? Why are they different? And, for that matter, why are there usually three of them? I always thought it was pretty cool that in almost every newscast, you get a sports report, a weather report, a traffic report, and a reading of the market indexes. It made me feel so important….

Typically speaking, the news will report the Dow Jones Industrial Average (currently around 17,000), the S&P 500 (currently around 2,000), and the Nasdaq (currently around 4,500). These indexes try to give you a quick reading on how a particular sector of stocks is doing. Let’s take these one at a time.

The Dow is an index that represents large, blue chip stocks. The index itself is made up of only 30 companies. The Dow components are chosen by its owner, the S&P Dow Jones Indices. Prior to this owner, the Dow was owned by Dow Jones & Company which also published the Wall Street Journal. This is important because I believe it is one of the reasons why the Dow is so widely followed. It is also one of the oldest market indexes, having been first published in 1896.

The S&P 500 is an index that is made up of 500 of the largest public corporations in the US. It represents about 75% of the total stock market capitalization in America. The S&P 500 only changes when something happens that warrants a change, such as a merger of two component companies or when a newly public company is large enough to be added.

I believe that the S&P 500 is a much better index than the Dow to gauge the performance of the U.S. stock market. For one thing, it incorporates more components. Obviously, aggregating 500 companies will give you a better feel for the overall market than just looking at 30. But, another problem with the Dow is that it is a price weighted average as opposed to a market cap weighted average like the S&P 500. Changes in the Dow are based only on the change in the price of the stocks, not the size of the companies. This means that higher priced stocks are more important to the level of the Dow regardless of how big the company is. For example, a $1 move in the price of Visa is only a move of 0.46%, while a $1 move in GE is a 3.81% change. However, both of these changes have the same effect on the Dow. Visa has a larger effect on the Dow just because it has a higher price and its stock easily moves $1 or more all the time. GE will hardly ever have a daily move of $1, and therefore has a much lesser effect on the Dow, even though it is almost twice the size of Visa. This price weighted approach means the Dow has less relevance when gauging general market performance. (An interesting side note is that at $700 per share, Apple would never have been included in the Dow because of the price weighting. But after a 7 for 1 split, Apple in the Dow is a distinct possibility).

The Nasdaq is a slightly different animal. The Nasdaq (National Association of Securities Dealers Automated Quotation System) exchange is a global electronic marketplace for trading securities. The Nasdaq composite is the market weighted average of all the stocks that are listed at the Nasdaq exchange. The Nasdaq includes over 3,000 companies and expands beyond US borders. However, because it only tracks companies that trade on the Nasdaq exchange, it will not include any of the companies that trade on its much larger counterpart, the New York Stock Exchange (names such as General Electric, Coca-Cola, and Goldman Sachs). The Nasdaq composite is significantly heavy with technology stocks and is often used to gauge the progress of the high tech sector.

Finally, it is important to note that these are only the three most popular indexes. There are dozens more that don’t get reported on. The Russell 2000 tracks the small cap sector, the Barclays US Aggregate Bond Index represents the US bond market, and the MSCI EAFE Index measures the major developed international markets, just to name a few. The point is to know what they are saying when they report on the stock market. And understand how all these numbers relate to your portfolio.

 

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

 

Gavin Chinn, CFS* Financial Advisor

Check the background of this investment professional on FINRA’s BrokerCheck.

An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.

“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”

Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.

So what is Gavin’s vision for his dream retirement?

“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”

When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.

Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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