• The Market: 101

    Drop It Dow Low: What is the Dow Jones?

    You may (or may not) have heard that the Dow Jones has been dropping it like it’s hot lately, dipping 1,150 points just last week. World events and uncertain economic conditions can result in market volatility — when the stock market changes moods faster than your teenage sister. But, what exactly is the Dow Jones? And why has it been making major money moves recently?

    The Dow Jones Industrial Average (DJIA) is a stock market index that includes 30 large, U.S. publicly-traded companies and acts as a thermometer, testing the overall health of the U.S. marketplace. Sounds a lot like the S&P 500 index, right? 

    Here are several key differences between the S&P 500 and the DJIA:

    S&P 500Dow Jones (DJIA)
    Founded in 1957Founded in 1896
    500 of the largest U.S.-based publicly-traded companies across all industries 30 of the largest U.S.-based publicly-traded companies across all industries (originated with just 12 companies solely in the industrial sector)
    Companies selected by S&P Committee (owned by McGraw Hill Financial)Companies selected by Dow Jones & Co. Averages Committee
    Companies selected based upon specific qualification criteria No defined criteria for how a company is selected — generally, must be a large leader in their industry
    Stocks within the index are weighted by market capitalization (market cap = # of outstanding shares x market price)Stocks within the index are price-weighted (the higher the stock’s market price, the more influence it will have on the index’s performance)
    Often considered the “single best indicator” of stock market performance, because of its broad and diverse collection of companies across all industriesMost well-known stock market index. But, because if its exclusivity (only represents 30 of over 3,000 US public companies), it is more an indicator of blue-chip stocks than the market overall

    OK, now that we’ve got a grasp on what the Dow Jones Index is, let’s talk about why it’s been dropping faster than your bank account after a trip to Target.

    The stock market can be affected by many factors, such as political changes, natural disasters, inflation, interest and exchange rates, and unexpected world events — just to name a few. Most recently, when the Dow Jones stumbled and fell by 4 percent in early October, it was likely due to sipping a cocktail of rising Treasury yields, the increased Federal Funds rate, and the China-U.S. trade war. Just like how you get a little wobbly after drinking one too many cocktails, the stock market also gets shaky (see: volatile) when too many uncertain events are mixed together at the same time. The stock market: it’s just like us.

    But, not to fear. Similarly to how you will drink lots of water, take an Advil, and eat greasy food to bounce back after a night out, the stock market bounces back, too. Usually, the severity of the market fall will determine how long it will take to rebound. Small corrections can be overcome in just a few days, whereas a full-blown financial crisis may take years to recover from (think: the 2008 Great Recession).

    To recap: the Dow Jones is the most well-known market index, comprised of only 30 companies across various industries, and is used to evaluate general trends in the stock market. Recently, the Dow Jones took a big tumble due to a woozy cocktail of world events and interest rate changes. But, don’t worry. Analysts remind us that the market often panics over everything and can sometimes be a bit overdramatic…#Relatable. So, for now, be prepared to ride the roller coaster of market volatility, because over the long-term, the market always trends upward. Ask Warren Buffett.

    Congratulations! You now know what the Dow Jones is and why it’s been in the headlines lately. But, this article was not meant to be an in-depth analysis of the Dow Jones (because ain’t nobody got time for dat). If you’d like to dig in a little deeper to the topics covered above, feel free to click on any of the hyperlinks (including that one) to become a Dow Jones expert. You’re welcome.

    Written By: Kaitlyn Duchien (@ktaylor1395)

    Contact Us: facethefearfw@gmail.com

  • Insurance

    Why Buy Life Insurance?

    As a millennial, life insurance is likely not high on a list of financial priorities. With rent, student loan payments, and other essentials, life insurance premiums can seem like an unnecessary expense. When you’re young and healthy (read: invincible), what’s the benefit of life insurance?

    I had these same objections just a few months ago. But then I learned more about the benefits, and I bought my first personal life insurance policy.

    Here are a few reasons why:

    • The cheapest time to buy life insurance was yesterday

    Life insurance gets more expensive every year, so why not buy it as cheap as possible? For a 25 year old male in good health, the premium could be as low as $18 a month! This policy would provide a tax-free $100,000 death benefit to your designated beneficiary if you die any time in the 20 year policy period.[1]

    • Buying now secures your insurability for life

    Let’s say you buy that 20 year term policy. If in 10 years you develop a significant health problem that could prevent you from buying more life insurance in the future, you are still protected. Even if you couldn’t buy life insurance because of your health impairment, if you currently hold a term policy, you can convert it into a permanent one, albeit for a higher premium, and keep it for life.

    • It’s not for you – it’s for your loved ones

    The main reason most people buy life insurance is to provide their family with tax-free money in the event of an untimely death. But what if you’re single and have no kids? Well, there are still plenty of people affected by your death! Your funeral expenses need covered, which can be $10,000 or more. Also, any co-signers on a loan you have may still have to pay that loan if you die. That $100,000 policy protects your family members. And remember, if you get married and have kids, but become uninsurable, you can convert the term policy into a permanent one.

    Life insurance when you’re young is inexpensive and has long-lasting benefits. It protects your insurability in the event of future health problems, and protects your family in the event of a premature death.

    Still not convinced? Or do you have other personal finance questions? Let’s talk! Face The Fear is here to help millennials make smart financial decisions that fit their lifestyle. Contact us at: facethefearfw@gmail.com

    [1] Protective Classic Choice Term, Male, Indiana, Age 25, $100,000, 20 year term

    Article Contributed By: Xavier Serrani

    Contact Us: facethefearfw@gmail.com

  • Videos

    Welcome to Face the Fear!

    Hi Friends! Nicole Ellsworth and Kaitlyn Duchien here. We are two motivated millennials facing the fear of our financial futures. Join us on the journey, as we dive into topics such as investing, retirement planning, life insurance, budgeting, and so much more.

    YouTube: https://www.youtube.com/channel/UC5PcXSzVvR9KZKWm4Ihh3pg

    Instagram: @Face.The.Fear

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    Podcast: Face the Fear (on iTunes, Spotify, and Stitcher)

     

  • The Market: 101

    Stocks and Bonds, James Bonds

    Stocks and Bonds, James Bonds

    When you think of the word “stock,” what comes to mind? You may think of the New York Stock Exchange. Or, maybe (if you’re like me), you think about how much you need to stock up on Peppermint Ice Cream before it goes out of stock again after the holiday season (just me?…okay).

    What about bonds? Do you picture a strapping Daniel Craig wearing a pristine black tuxedo, casually armed with a Walther P99 pistol, in hot pursuit of a criminal? Because I sure do.

    No matter what comes to mind, we’re going to dive in to the definitions of stocks and bonds (the financial kind, sorry Daniel Craig), discuss what they are, and why they are important to us.

    Let’s start with stocks. By definition, a stock is a type of financial security that allows the stockholder the right to ownership in a company. When someone purchases a company’s stock, they are buying a piece of that company, including the right to claim a portion of the company’s earnings (if they have any — aka if the company makes any money, which you sure hope they do if you invested in them).

    Think of stock like a piece of pizza. Say you and three other friends are hanging out on a Saturday night and suddenly the midnight munchies strike.

    All four of you decide to put in 2 bucks per person to buy a medium pizza for $8. When the pizza arrives, each person owns the right to ¼ of the pizza (or 2 pieces each), since you each contributed $2 for an $8 pizza with 8 slices total. #Math

    Now, obviously a pizza can’t magically grow in size. But for this example, let’s say that it can. Imagine the pizza miraculously doubles in size. Now, you own the right to 4 slices of pizza! Well, since you’re on a diet and you really shouldn’t eat more than two slices of pizza, you decide to sell those two extra slices to a new friend who (conveniently) stopped by after you all ordered the pizza.

    In theory, this is how buying a stock works. You own a portion of the company. When the company grows and earns profits, you are entitled to a percentage of those profits. You can then sell your portion of ownership in the company to someone else for more than you originally paid for it. By the way, that’s the ONLY way to make money with a stock — the company must grow so that you can sell your portion for more than you bought it for.

    What happens if the company loses money and the stock price goes down? Well, that’s the risk of investing — which is especially risky if you invest in just ONE company or sector of the market. If the one company you invested in (Target, for example) or sector of the market (all retail stores), suddenly goes out of business (don’t panic…this is just a hypothetical example), then you would lose all of your money very quickly. Thankfully, investors have alternative options, such as mutual funds, that allows you to invest in many different companies across many different market sectors at one time — thus limiting your overall risk.

    Okay, so now that we know what a stock is and how it can earn us money, let’s talk about bonds. Sorry, we’re still not talking about you, Daniel Craig.

    Unlike stocks, bonds do not represent ownership in a corporation. Instead, bonds are a type of loan that an investor can make to a company or to the government, which in turn, promises to return a fixed interest rate to the investor over a specific period of time. Ideally, at the end of the bond’s lifetime, the investor will be repaid her entire initial payment, plus a fixed rate of interest. This is why bonds are often called “fixed-income securities” — because they provide a fixed amount of income (in the form of interest payments) to the investor. Shocking, I know.

    Because bonds promise to pay back your initial investment plus a fixed interest rate, they are said to be less risky than stocks, which do not have a fixed rate of return and do not promise to return the money invested. However, bonds are not completely risk-free. The amount of risk you take with a bond depends largely on who is borrowing your money. In real world terms, you know that it’s a lot less risky to loan your mom a dollar than that one friend who is a notorious mooch and never pays anyone back. (I’m talking to you, Karen).

    Applying that same concept to investing, a bond issued by a young, relatively unstable company is much more risky than a Treasury bond, which is issued by the federal government and is essentially risk-free. Why is a Treasury bond risk-free, you ask? Well, the federal government has this amazing authoritative power called TAXATION, which means it can always raise taxes in order to pay back the interest on its Treasury bonds. As much as a normal company would simply LOVE to force its customers to buy their products (or else!), unfortunately, they can’t do that. This means that corporate bonds may not always be able to keep their promises of paying the investor a fixed interest rate, thus creating risk. Usually, the more risky the bond, the higher the interest rate will be. On the flip side, Treasury bonds usually have the lowest interest rates on the market. Low risk, low returns. High risk, high returns. You get it.

    Believe it or not, we’ve just barely scratched the surface of stocks and bonds. Tragic, I know. I don’t want to bore you to tears, so we’ll leave it at that for now.

    But, before you go, one last question. Why do stocks and bonds matter? Even if you don’t plan on being the next Warren Buffett, you should feel confident in understanding stocks and bonds, and identifying where they fit into your investment portfolio (Note: If you’ve got a 401(k) or retirement savings plan, chances are you’re already investing in several stocks and bonds, whether you realize it or not. Congratulations!)

    (QUICK DISCLAIMER: I am NOT a financial professional, so please consult one of those fantastic, educated, and far-more-qualified individuals BEFORE you dive into investing or making changes to your retirement plan). As a very general rule of thumb (not specific to every individual’s situation), the younger you are, the more your money may be invested in stocks and less in bonds. As you age and grow closer to retirement, the percentage of your money invested may gradually shift from stock-heavy to bond-heavy. The reason for this is, when you’re young, you have the advantage of time on your side to ride the up-and-down roller coaster of the stock market. Even when there is a market correction and you lose a portion of your portfolio, you still have decades before retirement to earn that money back. However, the closer you get to retirement, the less time your portfolio has to bounce back after a market correction. Thus, safer investment options like bonds will help prevent you from losing your entire life savings to a market drop right before you were planning on retiring and moving to Hawaii. AloNAH, you don’t want that to happen.

    Alright, now you know what stocks and bonds are and why they matter! Woot woot! Next step, consult with your financial professional to collaborate on an investing plan that is specifically designed to meet your lifestyle goals.

    And, don’t forget to check back here for new, exciting content to be released very soon!

    Written By: Kaitlyn Duchien (@ktaylor1395)

    Contact Us: facethefearfw@gmail.com