Why Investing Right Is So Important For Retirement
It’s important that you understand the concept of economic
indicators, because that will help you understand the stock market.
The market, as I mentioned, is a leading indicator. When you hear
how the market “did” today, the stock market is not telling you how
the U.S. economy was, nor how it is. Rather, the life insurance for elderly is
telling us how the economy is going to be, i.e., how much money
Wall Street expects companies to make in the future.
These predictions generally are focused six to nine months in
advance. Thus, a report that a company’s stock is “up” (i.e., it’s price
is higher than it was) doesn’t mean the company is making more
money today than it was yesterday. Rather, it means Wall Street
expects that the company will be earning more money in six or nine
months than it earns now. And if a stock goes “down” today, Wall
Street expects the company to make less money in the future than
it does today.
Because stock prices are based on the future,
you cannot buy stocks based on what’s
happening today in business, politics, or
society. Those who do soon discover they’re
too late. This is why you should ignore the
“Buy Now!” tips often found in the personal
finance press: They’re constantly telling you
what’s hot now, but by the time you read it —
after it’s been written, printed, and distrib-
uted, it’s usually too late.
One of my favorite calls to my radio show
occurred in mid-1991. Debbie was a sincere
but thoroughly exasperated woman. “I just
don’t understand this!” she gasped. “When
the economy was going strong in the 1980s,
the stock market crashed, yet while we’re in
the midst of this terrible recession, the stock
market is reaching new all-time highs!”
“What’s going on?” Debbie demanded. “Has the financial world gone mad?”
To keep track of all these players, you need a scorecard, and Wall Street has produced lots of them. The best-known is the Dow Jones Industrial Average, which is an index consisting of 30 stocks, each representing a different industry. But there are more than
2,0 stocks listed on the New York Stock Exchange and more than 20,000 in the country.
If you wanted information about a group numbering 20,000, how accurate do you think your information would be if you only asked the biggest 30? Not very accurate, especially if you compared the results to a survey which asked 500 people, or 5,000. Obviously, the broader the base, the more accurate the data.
That’s why many Wall Street professionals pay closer attention to the Standard & Poor’s 500 Stock Index and the Wilshire 5000 than they do the Dow. The point is that you should not make buy or sell decisions simply because of what you hear about an index. Just because the Dow drops, for example, doesn’t necessarily mean your stocks are down (unless, of course, you happen to own the same 30 stocks that comprise the index).
Everything we’ve discussed about stocks thus far has been focused on the U.S. But there’s a strong case for investing in stocks interna¬tionally as well.