Last week, solid economic and employment data seems to have buoyed the markets, which we detail in the attached for you as always.
In addition, we thought we’d have a little fun. Over the years, we’ve often been asked to help teach the “next generation” about investments and we always relish the opportunity.
So this week’s Update outlines a simple, interesting and powerful story that helps illustrate a key financial concept: compounding. The idea of money making money. We think you’ll enjoy sharing the story with the young ones who are important to you: children, nieces, nephews, grandchildren and the like.
It’s never too early… or too late!
Best always,
Lee and Jeremy
This Week’s Quote:
“Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it.”
~ Albert Einstein
JL Davis Thoughts This Week:
If you want to have some fun with your children, grandchildren, nieces or nephews while teaching them something about money, share a great story.
A few years back, I had a chance to go along to my granddaughter’s ninth grade classroom to speak to several classes on the subject of financial planning. It was an immense pleasure. As always, I came away impressed with just how sharp the kids were. Sadly, though not uncommon in our experience, only a few knew much about one of the most important and powerful elements of their future: money.
That elemental fact meant, as it always does, the opportunity to share a favorite teaching story called The Parable of Two Jobs…one you might enjoy sharing with some younger ones yourself sometime.
A brand new worker was given the choice of two jobs. Each job featured the exact same duties; nothing dangerous or particularly difficult, but very important work. Each job required exactly eight hours per day with a 30 minute lunch, seven days per week for exactly one month. Each job featured a great boss to work for. Each had fine working conditions. But unlike all other jobs we know of, neither of these needed to have taxes of any kind taken out of the wages paid (...this doesn’t happen in the real world, but this is a story!). However, the pay was a little different between the two jobs.
The first job paid exactly $18 per hour at the end of each day ($144 each day for 31 days). Quite a nice wage for a new worker and well over what is normally expected. The second job had a starting wage much less: it paid only one penny the first day. But the boss of the second job, being a great boss, agreed to double the daily wage each day for the full month (e.g. the second day’s earnings were 2 cents, the third was 4 cents, and so on). Another important difference: the second job only paid at the end of the 31st day and only if you worked all hours of all days.
Which job would you take? Why?
Not surprisingly, the kids almost unanimously agreed that the job that paid $144 each day was the best. You get paid every day for one thing. No waiting. Besides, they went on, how much could a penny add up to? I nodded approvingly, but continually asked if they were sure. In one particular class, I could see one of the young ladies busily tapping numbers into her calculator. After a few minutes of the discussion, she raised her hand to exclaim that she’d take job number two.
If you’d like to know why, send us an email for the results! Prepare to be amazed, and amaze others with the concept Einstein was so enamored with all those years ago!
One more thing: if you’re really interested in teaching a great compounding story, jot us a note with a name and birth date of the young person. We’ll email you compliance approved hypothetical mutual fund historical illustration showing what might have happened with a $1000 investment on that birth date—for educational purposes only. You and your young person will most likely be amazed.**
Market Week: August 5, 2013
The Markets
Another week, another record close: Domestic equities once again probed record territory as economic data continued to be just good enough to encourage investors without provoking immediate tapering of the Federal Reserve's economic support. The S&P 500 set a fresh record after passing 1,700 for the first time, and the Dow and the small caps of the Russell 2000 also hit new closing highs. The Russell has now more than tripled since its March 2009 low, the Nasdaq isn't far behind, and the S&P and Dow have more than doubled over the same time.
Last Week's Headlines
•The U.S. economy grew 1.7% during the second quarter. That's better than the previous quarter's 1.1% (which was revised downward from 1.8% based on the Bureau of Economic Analysis's most recent updating of the methodology used to calculate gross domestic product). Business investment that rose 9% and a 1.8% increase in consumer spending helped offset a 9.5% increase in imports, which are subtracted from GDP, and a 1.5% reduction in federal government spending. The GDP numbers will undergo two revisions over the next two months.
•The unemployment rate fell to 7.4%, its lowest level since December 2008. However, the 162,000 jobs added to the nation's payrolls in July were far less than the 189,000 jobs averaged over the last year, and the Bureau of Labor Statistics said part of the unemployment rate's decline from 7.6% in June resulted from some discouraged workers leaving the workforce.
•The Federal Reserve will keep buying bonds at its current pace. The announcement noted the recent increase in mortgage rates as a potential threat to economic conditions and called current growth "modest" (a slightly more pessimistic reference than the "moderate" language used in recent statements).
•Average home prices in the cities tracked by the S&P/Case-Shiller 20-city index saw their strongest year-over-year increase--12.2%--since March 2006. May's 2.4% gain put home prices back at their levels of spring 2004, and the average price in two cities--Dallas and Denver--hit new all-time records.
•U.S. manufacturers saw accelerating growth in July. The Institute for Supply Management's gauge of manufacturing activity rose from June's 50.9% to 55.4%--the highest reading of the year--and reports of new orders hit 58.3%.
•Consumer spending rose 0.5% in June, according to the Commerce Department, while personal incomes were up slightly less. However, adjusted for inflation, incomes actually fell 0.1% instead of rising 0.3%, and the inflation-adjusted increase in spending was only 0.1%.
•The European Central Bank left its key interest rate unchanged at 0.5%.
Eye on the Week Ahead
As earnings season begins to wind down, a dearth of economic data could allow equities markets to digest their recent gains. Also, public statements by the presidents of several of the 12 regional Federal Reserve banks could clarify the cases being made internally for and against tighter monetary policy.
Key dates and data releases: U.S. services (8/5); balance of trade (8/6).
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013
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