Let's Get Started - The Dow Jones Industrial Average

I have to begin with a sincere apology to my readers.  I know that it has been quite some time since I posted to this blog, and I am sorry for the lag in posting.  That's enough of that.  I won't let it happen again.  

Well, as I said in the very first post, this blog is dedicated to financial education.  So, let's get started, shall we?  This post is dedicated to the Dow Jones Industrial Average (DJIA), or Dow, for short. So what is the Dow?  Well, anytime you hear someone refer to the markets in a broad sense, they are probably talking about the Dow.  While there are several other "markets," or "averages," the general public typically refers to the Dow as "The Market." 

The Dow Jones Industrial Average was created by Charles Dow in 1896, and is the oldest and most watched index in the world.  The DJIA is a price-weighted average of 30 large corporations across several different industries, and serves as pretty accurate indicator of how the broad markets are doing.  The companies represented range from ExxonMobil to Verizon, Bank of America to Wal-Mart, and AT&T to United Technologies.  Want more?  The entire list can be found at http://www.djindexes.com.

How is it calculated?  Quite simply, actually.  The Dow Jones Industrial Average is calculated by adding the stock prices of each of its components (Bank of America, ExxonMobil, etc.), and dividing that number by the price-adjusted divisor, published by the Dow.  For example, the total price of stocks in the DJIA today of $1,447.27 divided by 0.122834016 (DJIA divisor), equals today's DJIA of 11,782.35.  Easy, huh? 

I challenge you to come back in 2 weeks and calculate it yourself using the components found at the Dow's website, listed above.  You can use the divisor I used for your calculation.  You want to impress someone?   Start off by telling them you know how to calculate the Dow Jones Industrial Average.

Start Young

It's pretty obvious that we live in a world where people can't seem to agree on anything.  This is especially obvious during an election year when it seems that candidates from all aspects of the political world actually thrive on their disagreement with opposition parties.  Things are no different in the financial world, with experts on all sides of the market offering completely different market predictions based on the same financial data.  So, when these financial experts agree on anything, it's a pretty big deal.  That one thing that all experts can agree on is the basis of our first, and undoubtedly most important financial basic:  Start Young.  That's right, START YOUNG.  Case study after case study and statistic after statistic each confirm that starting an investment plan at an early age yields major dividends.

Allow me to provide an example of this financial basic.  Investor A invests $1,000 a year starting at age 25, and ending at age 65, for a total investment of $40,000 over a 40 year period.  Investor B invests $1,000 a year from age 45 to age 65, for a total investment of $20,000 over a 20 year period.  If each investor receives a 7% return on their money through age 65, Investor A will have turned his $40,000 investment into $214,610, while Investor B would have turned his $20,000 investment into $44,865.  Big difference, huh?  Investor A made almost 5 times the amount of money that Investor B did.  That's a HUGE difference!  "But," you may say, "Investor A made a much larger investment, twice the the amount of Investor B."  Yes, that's true.  However, both investors made the same contribution each year, $1,000.  The only differing factor is time; Investor A started young.  

Does this mean that if you are older than 25 that you've missed the boat?  Absolutely not.  It only means that you have to invest a little more money each year to catch up.  After all, Investor B still doubled his money in 20 years.  That's twice as much money as he would have if he didn't invest at all.

Think you can find a way to come up with an extra $1,000 a year?  I bet you can.

What the heck is Wealth Tutor?!?

Hello, and welcome to the Wealth Tutor blog!  The goal of this blog is to educate my readers on the importance of a solid financial education while expanding their knowledge of the financial world around them.  Since this is my first attempt at a blog, I'm going to need your patience as I learn the ins and outs of this crazy medium.

I'd like to start out by spending a little time explaining the purpose of this blog, and why I feel led to write it.  No matter where you turn today, you can't seem to get away from all of the bad news in the economy.  From sub-prime mortgage meltdowns, to the consumer credit crisis, to lending institutional lament, everyone is crying the blues about the economy.  But why?  Well, I believe that each and every one of us is responsible for the shape of our economy.  I feel that a complete lack of understanding is the root cause of our economical woes.  It astonishes me to see that high school seniors can graduate school with a complete understanding of how to find the area of an isosceles triangle, but cannot tell you the effect a 13% interest rate has on their car loan.  Without a firm foundation in the basics of money and money management, we are doomed to fail.  And that, my friends, is what I hope to change.

Each post on this blog will pertain to a different financial basic; a stepping stone on the path to financial prowess.  The topics will range from simple banking terms like Interest Rates (and what they really mean to you), CDs, and Money Markets, to amortization tables for a mortgage or car, Vent vs. Buy scenarios, stocks, bonds, ETFs, and mutual funds.  There is a great big world of simple finance out there that we have completely missed.  So strap in and hold on, because you are in for one heck of a ride.