Dow 12,000? So what!

The financial media has been growing increasingly giddy over the prospect of the Dow Jones Industrial Average (DJIA) eclipsing 12,000. Now you're probably thinking "haven't I heard this already?". Indeed, you have. On Monday, Tuesday, Wednesday and now today, the Dow hit an intraday high of just over 12,000 - a level considered to be a key level of "resistance" for the overall market. The Wall Street Journal's homepage has a headline boldly proclaiming: "Dow Regains 12,000". 

Not to be outdone, similar headlines can be found all throughout the financial press, detailing the minute-by-minute moves in the Dow as it approaches, reaches, and surpasses 12,000. In the case of the last 3 days, this type of reporting held little relevance because the Dow didn't close above 12,000. The last time that the Dow closed above 12,000 was during the height of the financial crisis - on June 19, 2008 - when the index closed at 12,063. Thus, given all that's happened in the financial markets the past few years and the way that stocks have rallied since their bottoming out in the beginning of 2009, 12,000 may seem like a significant level for the Dow.

Alas, it's not. The constant reminder that the Dow is "regaining" 12,000 serves more as a testament to the resilience of U.S. markets than anything else. It holds little educational or predictive value. After all, the Dow only includes 30 companies and the true driver of stock prices - expected future earnings - have not changed all that much in the past few days.

From a psychological perspective, Dow 12,000 is a good sign because it means that investors have renewed optimism in stocks and are pushing prices higher. On the other hand, what do investors gain by reading news headlines detailing tick by tick moves in the Dow as it approaches a level that holds little relative importance? Not too much, especially since the fundamentals of Dow 12,000 are pretty much the same as Dow 11,999.

Gen Y Home Preferences & Investing

The Wall Street Journal noted interesting findings from a recent panel regarding Gen Y's housing preferences. Last week's National Association of Homebuilder's conference broke out a few panels that discussed how millennials differ from their Baby Boomer parents in what they look for in a house. The article noted that Gen Y's "want to walk everywhere" Further, "surveys show that 13% carpool to work, while 7% walk" and Gen Y still much prefers city living as opposed to settling down in the suburbs. In fact, 88% of the survey respondents reported the desire to live in a city.

This should not be surprising as Gen Y's are known to crave action and excitement, traits that are no doubt due in large part to our growing reliance on technology and socializing. The hustle and bustle that comes along with our rapid socialization also leads to our interest in city living as cities are key population centers where we can be exposed to as many people and as much activity as possible.

Interestingly, much of what we know from these surveys about Gen Y's housing preferences can tell us a lot about Gen Y's investing habits. Indeed, Gen Y's tend to be more interested in active trading and other strategies centered on high activity rates. Unfortunately, this is also a very costly endeavor that can quickly eat away at any investment returns that are actually generated (and odds are, they won't be).

The old axiom "don't just stand there, do something" applies to Gen Y investors as they stand now but it shouldn't. In fact, as John Bogle notes, all investors should heed the following instead - "don't just do something, stand there". In the end, passive investment pays off for all investors.

Erasing the Gen Y Debt Burden

Unfortunately, much of my recent posts have been regarding things that millennials are "doing wrong" when it comes to saving and investing. I've noticed that most Gen Y's who have poor saving and investing habits are in such a predicament because their parents may not be great savers. The old saying "the apple doesn't fall too far from the tree" is quite true when it comes to successful saving and investing habits. After all, young people are quite impressionable and even leading up into our college years when we crave independence, many of us still look to our parents for signs of successful money management.

With that said, if you have manageable credit card debt - and 38% of Gen Y does - start paying it off! The time to do it is now, while you're still young. The worst thing in the world you can do when it comes to paying off your debts is to wait.

Even better, pay off your debts in full, if you can. While that may seem unrealistic and come at the sacrifice of immediate savings and investing goals, remember that you have plenty of time to work towards your investing goals and you will be much better off having gotten the debt burden off of your back.

After all, interest costs will ultimately grow exponentially if credit card debts go unpaid or if you continue to just pay the minimum payment each month and then any future earnings you have will likely go towards paying off your creditors. This is a sad situation that many millennials face but it shouldn't dishearten you from an investing perspective. Once the debt burden is erased, begin to focus on investing your money and you will feel so much better knowing the specter of a credit card company is no longer in your rear-view mirror.

Gen Y's Risk Aversion

A recent Kiplinger's article points out that Gen Y investors are typically more risk averse than other generations were when they were the same age. This risk aversion means just what it says - Gen Y investors are less comfortable with risk - and in turn have put more than half of their savings in relatively safe investment vehicles like "bonds, money market accounts or cash" as the article points out.

The article also goes on to examine the reason for this risk aversion, pointing out the following:

"They've seen little or nothing of the upside of long-term investing in stocks. In the decade since the oldest Gen Yers entered the workforce, the stock market has languished. Worse, many saw their parents' savings evaporate in recent years. If that reluctance to invest in the stock market lasts, many will come up short in their golden years."

While I'm sure the roller coaster ride that the stock market has taken investors on in the wake of the financial crisis was unsettling for many investors, I believe Gen Y's risk aversion boils down more to their temperament and personality. After all, Gen Y tends to have a shorter attention span and a burning want for instant gratification. Maybe they simply don't understand the benefits of investing the stock market and don't have a desire to learn. As a result, they park their cash in relatively risk-free vehicles like CDs and money markets, earning a meager return that can be eroded by inflation.

If Gen Y investors aren't motivated to learn about the importance of taking on at least some risk for higher potential investment returns over the long-term, it will be very difficult to change that mindset since it's probably ingrained in their psyche already. It can be done, however, and I remind readers that while risk aversion can be important, it's simply not practical for Gen Y investors.

We have the most to gain when investing because we have time on our side. However, in order to utilize that time we need to take some risk so that we can be compensated for bearing that risk. A time-tested investment principle continues to hold true, all else being equal: greater risk equals greater potential reward.

The Talk: Children and Debt

Mutual fund giant Vanguard shared a link from DebtWatchdog.com entitled "How to Stop Your Children from Getting Into Debt". The article offers up six different ways in which parents can teach their children how to manage their money better. While I like many of the points that the article brings up, I think they're all predicated on a single issue: honesty.

By being honest with your children regarding money issues, there will be a deep mutual respect that will last a lifetime. After all, if your child does not know that you are a struggling financially, how can you expect to "give them the world" when "the world" requires lots of money these days? Indeed, the old adage is correct in that money isn't everything; unfortunately, in this day and age we're often of the perception that it is - and perception is everything. Remain honest with your children and talk with them about your financial mistakes. After all, if they don't recognize that bad financial decision making can lead to severely adverse consequences, then what will prevent them from making the same mistakes you did?

Correlation Does Not Imply Causation

A key scientific principle is that correlation does not imply causation - basically, even though event A and B may be correlated, it's not necessarily true that one caused the other. This is very true in the investment world, in large part because financial markets are so complex and there are so many different variables at work. After all, with trillions of investment dollars sloshing around worldwide, it's highly unlikely that a singular event will be the absolute cause of something else happening. Even when venerable investment banks Bear Stearns and Lehman Brothers failed, many securities fell for reasons relating to their collapse or financial destruction elsewhere - it's simply impossible to tell.

I bring this up because I read an article on TheStreet.com this morning which stated the following:

"The charts of the U.S. dollar index and the SPDR S&P 500 ETF clearly show the inverse relationship they have. Right now it seems everything is directly connected with the dollar; it has been like that most of the year."

While the article doesn't explicitly imply that the two are correlated, the author seems to suggest that because certain indexes and financial products have a chart pattern inverse of the dollar, that the dollar's movements seem to affect them. While this may be the cause in some extreme instances, ultimately, the dollar is moving because of other variables - monetary and fiscal policy, economic indicators and geopolitical issues, among other things. To understand why a security is moving, you have to dig a little deeper; don't take a chart pattern at face value.

Final Tax Vote Up to House

The Senate has passed a 2-year extension of the Bush tax cuts which will now go in front of the House for a final vote. The good news is that it appears as if this bipartisan package will pass and every American will retain lower income, dividends and capital gains taxes which should help spur investment and economic growth. This is fantastic news, particularly for Gen Y investors who will be able to use the lower tax rates to their advantage and compound returns over a larger base. The next step for Congress heading into the 2012 elections should be making these tax cuts permanent.