You hear about the Dow Jones Industrial Average (DJIA) on nearly every major news station. It seems to be every economist’s favorite way to watch the market. What is it? How is it calculated? and Why is it no longer the best?

What is the Dow Jones?

It is one of the many Stock Market Indices used in the United States to guage total market performance.

The index was originally created by Charles Dow, cofounder of Dow Jones & Company- the Co. that produces the Wall Street Journal.

It was originally made to track the industrial sector of the market, hence the djIa.

The DJIA is composed of 30 of the largest companies in the United States. The only company to remain from the original 12 that made up the DJIA in 1896 is General Electric.

So how is it Calculated?

Its actually pretty simple.

The formula is very simple. You take the sum of all of the prices of the 30 stocks in the index and divide them by a divisor.

In 1896 the average was a pure average. In other words, it was the sum of the prices divided by 12, the number of companies in the DJIA.

The divisor is changing though. It changes, as companies in the DJIA go through situations like stock splits, in order to keep the value constant.

The divisor is currently 0.12283402. Because it is below 1, it yields a DJIA value that is larger than the sum of the prices in the index.

This doesn’t sound so bad?

It wasn’t in 1896. It was pretty cutting edge then.

You see- In 1896- there were no computers or calculators. So, the trading day would close at 4:00PM so that all of the bankers could sort out the day afterward, and the most that any index could really handle- find the prices for, add them up and divide- was about 30 different companies.

In modern day, with computers running the show for us, there is no need to limit our stock analysis at 30 stocks. With Indices like the Standard & Poors 500- analyzing 500 different companies – and the Wilshire 5000 – looking at 5000 different companies, the DJIA is simply not the most accurate way to follow the market any more.

So my advice?

Keep using it. Everyone else is. But dont use ONLY the DJIA.
Look at as many different indices as you can when guaging market performance.

His website has him quoted as saying:

“We can achieve universal access to quality, affordable health care without bankrupting our children with trillions more in debt or imposing draconian tax hikes on all Americans.”

I haven’t spent much time looking into his plan: the Patient’s Choice Act; so I am by no means claiming that he has a good plan here. I have no idea.

What caught me off guard was something else that he said during his interview.

“We are simply not in a position as a nation to be increasing our spending any more.”

This reminded me of what debt counselors tell people. Its a lesson everyone needs to learn at one point or another. Don’t purchase things until you’re in a position to purchase them.

For some reason, it all made sense to me.

Although we have many, many fiscally wise people in charge of our nation; Group think has reduced America to a teenage money mindset.

The nature of our government reduces the vast majority of politicians and leaders to being utterly powerless with these sort of issues.

If they’re not in power- who is?

Well; although we tried to put some of the more educated people in the hot seat to deal with fiscal issues– Americans want something and they want it now. When that happens- politicians either deliver or they leave office.

With this approach nearing 250 years in the making, America’s debt is well over $11 Trillion dollars.
In fact: Since September 2007 it has increased an average of $3.88 Billion per day!

As America decides that they don’t care about their current debt- they want healthcare and what’s another trillion on top of eleven trillion; she reminds me of a girl I met in a marketing class.

“I lost my job, but its no big deal. I just took out another student loan and I figure I’ll live off of that for a year. That way I don’t have to worry about money.”

Noooooooooooooo!!!!

That’s the road we’re walking down, Nation.

Do you want to live in a hormonal teenage country?

Or do you want to live in a country that has control over it’s own destiny?

The choice is being left up to each and every one of us. We need to make clear that debt is not acceptable.
Our country needs to get this deficit under control; or else we’ll each be paying for our nation’s childish decisions in the frighteningly near future.

If you want to Fix this problem:

Contact your Senator and Representative! Let them know what you think.
As I said before: their job is to appease you in congress. They are there to represent your ideas!

Don’t know your congressmen?
Use Visi.com’s tool “Contacting the Congress” to find your congressmen and their email addresses.

Have you ever wondered why the government is so terrible at fixing our economy? Well, its not all their fault. Today we’ll start a series about why they can’t quite make it work and the Lags associated with Fed Intervention.

Show me This Business Cycle thing

Below is what is known in MacroEconomics as “The Business Cycle”:
This is just a fancy way of saying “Showing that the economy goes up and down on a graph“.

The blue line is the business cycle as is, with its ups and downs- and the black dotted line is the long term trend of the business cycle.
As you will see, a free market economy (like the USA) always goes upward with time in the long term trend.

These ups and downs are awfully dramatic.

So what is the Gov’t Trying to Do?

The government’s goal is to achieve a line closer to the green one below, with less up and down swing. The less dramatic our economy as it continues its upward trend, the more content are the people. And as we all know- Government strives for the happiness of its people at all times….

Now – as the government tries to solves these issues with actions like tax increases and decreases, interest rate adjustments and spending, certain Time Lags come into play which disrupt their actions.

What do we mean by Time Lags?

If you’re a gamer, you’re familiar with the term Lag. There are three types of lag that affect the Fed’s response to economic woes or booms.

The Recognition Lag

The recognition lag takes place because when a Recession starts or ends, we simply can’t know it!
Huh?

It takes somwhere between 3 and 6 months for our Government Census bureaus to recognize that the economy has taken a turn for the better or worse.

So if the economy actually takes the turn downward at T1 (above), the government will continue high taxation, high interest rates and low spending as if the economy were in a boom until T2 months later.

This means that the government is actually fueling the recession for several months before it sees that it should be responding to a falling economy.

Well we Finally Realized it…

But notice… T2 is awfully close to the natural end of the recession.

Now that the Feds will start responding to a recession, it may well be nearing an end.
This means the Fed’s are unnaturally fueling a Boom now- which will have to come crashing back downward toward the trend, causing a more violent crash in the future.

But-
Even if we could somehow eliminate this Response Lag- the USA leaves us with two more.

So we’ve finally made it through the Response Lag.
The Feds have realized that we’re in a recession.

Putting a plan into action shouldn’t be hard! … Right?

Why Democracy Screws Up Economic Aid

As with everything else:
Our Government must argue over the means by which we come to an end.

The Bipartisanship of our government causes an Implementation Lag-
This is the time it takes for the government to draw up a plan and execute.

Let’s say that it now takes from T2 to T3 for the Government Officials to finally agree to a plan and implement it.

I’m being very generous illustrating it as less than the Response lag.
Implementation Lags are almost always MUCH longer than response lags.
Politicians don’t tend to get along well when it comes to money.

So as you can see- By the time that the government is responding to the crisis- we are naturally out of the Crisis and on our way up.

Atleast this must be where the lagging ends.

Wrong.

The government and our checkbooks have managed to make it through the Response Lag and Implementation Lags now.

The Recognition Lag is caused by the time it takes for Government’s actions to actually affect the economy.

Money takes time to Spread

As money is spent by the government and taxes are lowered- two things start to happen.

While highways are being built, schools are being built, people are being employed to perform meaningless tasks- money is being pulled out of the Government’s coffers (actually Lenders’, but that’s another post) and put in the peoples’.

Brokers in New York and across the country are also regaining their confidence in the economy.

These sort of events take time.

As you can see in the picture- By the time we reach T4, we have already come fully out of the dip- and the government stimulation has pushed us into an unnatural boom.

This boom MUST come back down to even out with the long term trend (because growth beyond the maximum can’t be sustained by the economy in the long run) causing an even worse recession.

This is Why the Government Can’t Help!

As the government tries to help, good intentioned they may be, they simply are unable to respond quickly enough and in the end do more damage than good.

1. Clean up your Budgets!

This is the equivalent of a company cleaning up its balance sheets. Anytime any one (the government, investors, lenders) wants to see the true quality of a company, they go to the balance sheet.

This applies in personal finance as well. By making sure your debt and equity are in Balance, you can keep yourself solid for the hard times.

Start this process by eliminating debt. Dave Ramsey advises the Debt Snowball method that you can read more about in his book, Total Money Makeover. Think of it this way: If you were entering into this recession with no expenses except your basic utilities, wouldn’t you be seeing it in a different light? That’s why its important.

2. Build up your Savings

Now consider approaching this recession with no expenses but utilities, and enough money in the bank to cover all of your expenses for the next year. You would definitely be approaching this recession differently.

Most Financial analysts advise you to save 10% of your income; As a college student, you may want to save a little more. I’m saving 30% right now, and I’d love to be able to put away more.

3. Get a Job and Keep it

Don’t have a job? Make sure that if recession seems on the horizon, Get one.

Have a job? Excellent!

Keep it.

That’s very simple, but there’s a more important step here.
The “Keep it” part isn’t always so easy. Especially in a downsizing, recession atmosphere.

So make yourself necessary. When your company realizes it needs to cut costs-employees will be quick to be downsized. By making sure that you are important to the company, you lower your chances of being one of those downsizes immensely.

If you’re not working on an important project right now, get signed up for one.

If you can’t get signed up on one, volunteer.

What’s an important project? When a company looks to downsize; they look at people as profit generators or expenses. Be sure that you are signing on to something that makes you a profit generator.

4. Invest through the bad

The whole mentality of the stock market: Buy Low, Sell High.

So I never understood people’s mentality when we dip into a recession and no one buys?

When you know its a low in the market, why wouldn’t you buy?! Make sure, that no matter how ugly everything’s looking, that you find the solid companies out there and continue your regular investing. By doing so, you’re going to virtually guarantee a sizable return at the the following boom.

Recessions, though difficult, can be an outstanding tool if used correctly.

They aren’t fun for the majority of people; but its a Dog-eat-Dog world, and in Capitalism, someone will come out on top. Take the steps to be sure that its you.

How are you Surviving the Recession?

What steps are you taking to recession proof your finances? Do you practice anything that makes you more secure in times such as these where things aren’t looking so hot?

What are you doing now that you can carry over into the good times to improve your personal finances?