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When it comes to talking about the Dow Jones Industrial Average, you’re referring to the marketplace. And while you should be aware of its current state, understanding its history is the only way to predict it.

How do you plan your retirement without forecasting your finances?

In this episode, I discuss what the Dow Jones Industrial Average reveals about protecting your portfolio today and preserving finances from an ever-changing marketplace tomorrow.

Show Highlights Include:

  • The “Dow Jones Industrial Average” crash course for a portfolio that replicates wins and protects you from economic losses. (1:36)
  • Why your understanding of market history preserves the retirement goals you make today. (4:58)
  • What the General Electric Company reveals about marketplace change and how to protect your finances in any environment. (8:26)
  • What the marketing index is, and how to use it to protectmeans for protecting your investments and diversifying your portfolio. (12:00)

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in, to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. Before we get started to find out more about me or my team here at one foreign police, you can go to our website at PensionAttention.com or you can give us a call at (805) 409-8150. Again, PensionAttention.com or (805) 409-8150. And I want to thank each of you for tuning in each week here to Pension Attention and please make sure to subscribe and leave us a comment. Always good to know the feedback of the show, and you can go to our website again at PensionAttention.com, you can click on the media tab and there you can download and subscribe each week to the episodes. Or if you don't want to do that, you can go and download Pension Attention on any platform where you would normally download a podcast, whether it's Spotify or Google, or even the iTunes app. [01:36.1]

Today on Pension Attention, we're gonna be talking about the Dow Jones, Industrial Average. Everyone knows that index. They actually refer to it as the market. Sometimes we don't even realize that we're referring to it as the market. But when I sit with clients, whether they're prospective clients or current clients, they talk about, Hey, Brad, what do you think of the market? How do you think the market's going to be doing questions like that, they subconsciously, or maybe consciously realized they're actually talking about the Dow. So, I thought, you know what? That's a great episode to actually have about, what is the Dow Jones industrial average. We know we hear those words pretty much every day, especially if you're watching the news lately, but again, not too many people I've realized, actually know what they mean. So, I want to go back in time a little bit as you know me, I liked a little bit of historical research on this to kind of walk through how this started and what it means to us today. [02:27.0]

So, when I mentioned going back in time, we're actually gonna go back to the 1880s. The Dow Jones industrial average was started by two men, a guy named Charles Dow and a guy named Edward Jones. Dow was primarily a journalist. He grew up in Connecticut in the new England area and he was a writer and reporter for The Providence journal and The Daily Republican. Now another fun fact about Charles Dow eventually Dow will become the founder of the wall street journal. Now Edward Jones, his partner was primarily a statistician, a smart numbers-based kind of guy. Now in case you're jumping ahead of me, oddly, this Edward Jones that I'm speaking of bears, zero relationship to the firm many people know as Edward Jones who founded Edward Jones Investment, which by the way, that's located in St. Louis, totally separate guy. Okay. [03:16.5]

So, in 1882, Charles Dow the journalist and Edward Jones, the statistician partnered with a third fell, a guy named Charles Bergstresser to form a new company called the Dow Jones & Company. Now Bergstresser to me when reading about him and looking at some historical data on this subject matter, he was an interesting guy. Like Dow, he was primarily a journalist, but he was also the money guy. You know, the guy who comes up with the finances needed to actually start this new company, the Dow Jones and company, and the Dow dozen company was located on wall street in New York city. And a few years later in 1889 because of where their new company was located again, right in wall street on New York city, it was Bergstresser that suggested that Dow name, a newspaper he was starting The Wall Street Journal. Again, fun fact, as we go into the Dow Jones Industrial Average. Now Charles Bergstresser, he was pretty creative. I got to admit he was modest and he wished to be a silent partner in the new venture Dow Jones & Company. He didn't want his name in the lights. So, in 1882, the three partners opened the door of their new company, again, located on Wall Street, but the sign on the building simply read Dow Jones & Company. The company began operations, they simple we'll call it a simple investment company. But then in 1884, Charles Dow had a great idea rather than tracking companies individually, he thought that he tracked a group of companies providing a broader look at how the U S economy was performing as a whole. [04:44.1]

This type of grouping became known as what we know today as an index and after creating the first Charles Dow then created several others. Dow’s very first index focused on the transportation sector of the U S economy. And in 1896, he created a second index, The Dow Jones Industrial Average tracking the results of 30 large companies involved in heavy manufacturing. Today the Dow Jones industrial average is still composed of 30 companies, but hardly any have anything to do with heavy manufacturing. It's made of companies like American express, Apple, Walgreens, Goldman Sachs, and IBM and 25 other household names. One of which I'm going to go into in the next segment here. And as you might imagine, because an index represents a cross section of American businesses reflecting what is going on in the U S economy as a whole index performance, good or bad is pretty susceptible to policy coming out of Washington, DC, as well as being affected by unforeseen geopolitical events that that can happen around the world. [05:46.9]

When I was doing some research on the Dow Jones Industrial Average and writing this episode this week, there was an article in MarketWatch about two years ago, and the article carried the title, the Dow Jones tumultuous 120-year history in one chart. Now in the article, they examined a chart showing the Dow’s performance since 1896 and as the article states and I quote the chart shows the indexes peaks and troughs have reflected the indexes, triumphs and tribulations. But more than that, the graph also illustrates how the Dow has become a chronicler of investors responses to significant global events. Now further along in the article, they write investors must stay fluid to changing market conditions. There is no get rich quick scheme investing is more challenging than brain surgery and quote, okay. [06:37.0]

When you look at the history of the Dow, there have been a lot of ups and downs, generally riding the incoming outgoing tides of say world events and sometimes Washington's policies and economic activity and social moods as of late. There've been periods of oppressive regulation, as well as too little regulation, high interest rates and low, as we've seen recently. There've been outright wars in the time period when you track the Dow Jones Industrial Average. Military excursions, and adventurism into various countries, political structures, let's say. And I think right here because of the index being one of the oldest index is the first really index and that tracks what is going on in our economy, it's why we refer to it “the market.” So, it’s so vital to understanding what these 30 companies are doing that gives us a good depiction into the market. And if you look at the history of it, when this article I referenced talks about as being tumultuous, the reality is it's a long time period, number one, and a lot of economic factors, companies changing hands with inside of their why it's so important to look at it as a market and it's in our portfolios here at ONE Fire and Police and all of our clients listening right now, it's a part of your portfolio, no doubt, but it's also part of your portfolio with regards to the S and P 500, the Russell 2000 indexes, and then individual companies with inside of those indexes that we feel are fundamentally strong and we put together an overall portfolio structure for our clients based on their retirement timeframe, their cashflow need their distribution rates. Those all come into picture as we build a portfolio and the Dow Jones Industrial being the largest and the oldest indexing is why I think we all refer to it as the market. [08:21.4]

So, I want to switch gears for a second and talk about a specific company that was in the Dow Jones Industrial Average for 123 years, and just recently removed. Now for those of us who enjoy American history, you've probably been to or visited the New England area and have seen history all over the place from the founding of this great nation to its intellectual development and industrial innovation, New England in particular, again, not just being the home of Tom Brady and the New England Patriots, it's actually a very profound and American iconic place. New England has often been the first step in many notable endeavors, we'll call it. In fact, as I was thinking about this several years ago, one of my clients, kids were looking at and toured a college on the North shore area of Massachusetts. And to visit you'd have to travel through a city named Lynn it's somewhat of a rough area. The locals would say, Lynn Lynn, the city of sin, if you look it up, you'll kind of see that. But Lynn like so much of New England has its own unique story to tell. On a street name, Western Avenue, there are huge general electric buildings. It's such a built-up area in fact, you could actually you'll pass right by them, never really, honestly, never really given them much thought. And, and through the windshield of a car Lynn’s, sprawling general electric facility, visually melts into the overall cities like the urban landscape. It's pretty cool division there if you've been there. [09:45.8]

But in reality, those general electric plants represent a lot, which is why I'm talking about it today. They're a piece of American industrial history. You see in 1883, the Thompson Houston electric company was formed in Lynn to help satisfy the country's growing demand for electricity. And at the time America was going through a period of rapid industrialization, the industrial revolution, going back to high school studies here, right? The Thompson Houston electric company was largely funded with money from Lynn businessmen. Many of whom made fortunes in none other than shoe manufacturing, pretty crazy, right. And one such investor was a man named Charles Coffin who owned the Coffin and Clough shoe company. [10:27.4]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the drop program? Go to www.pensionattention.com to find out how we can help. [10:43.7]

Okay. So now Charles Coffin, when reading about him, he was a very capable well-respected businessman. And when Lynn's business community was looking for someone to head this newly formed Thompson Houston electric company, they chose the shoe magnet, Charles Coffin. So then in 1892, as fate would have it, the Thompson Houston electric company of Lynn merged with the Edison General Electric company of Schenectady, New York to form one larger entity, which became known to all of us as General Electric. And for anyone old enough listening and me being a huge Reagan fan, I can't help, but hearing his words for General Electric here's Ronald Reagan. Good evening. Anyways, take a look. I digress. But yes, that general electric and Charles coffin, the Lynn Massachusetts shoe tycoon became GE’s first Chief Executive Officer CEO, and soon thereafter in 1896, a financial genius by the name of Charles Dow, who we just spoke about in our last segment formed his iconic stock index, the Dow Jones Industrial Average, which back then consisted of only 12 companies, one of which was General Electric. [11:53.2]

Okay. So fast forward, a little over 120 years since then, until about three years ago, GE remained the only original company still listed in the Dow, quite a Testament, in my opinion, to the staying power of this quintessential company. One that was once synonymous, believe it or not with American business, but since 2018, GE is no longer part of the doubt. It was actually replaced by Walgreen's the drug store. And for many years, General Electric had been one of the worst performers in the Dow Jones Industrial Average. And things got really bad in 2016, GE stock was downgraded following some disappointing earnings. So, what was once considered the bluest of all blue chips had begun aggressively cutting costs and ultimately selling off business units. Now, again, back about four or five years ago, GE had actually hired a new CEO who after just 14 months, a little over a year on the job was actually given his walking papers.I wonder if he was wearing a pair of shoes made in Lynn. I mean, let's be honest here, this guy was Austrade out the door about the same time he walked in. In addition to getting rid of him, GE shed billions of dollars in costs through again, the sale of assets and reduce dividend payments to shareholders. You might remember this, if anyone who owned GE at the time in 2016, it was announced the dividend payments would be cut in half. [13:15.5]

Now as the front page of The Wall Street Journal described things at this time. And I quote GE takes a knife to dividends under a restructuring plan that will slash the annual dividend by $4 billion. So, this for a company that was historically among the biggest dividend payers in the US and one that a ton of America's retirees depended upon for their income with these dividend payments. At the time I remember reading this and I brought it back up for writing this episode today was GE's new CEO was quoted as saying, and I quote, we understand this is an extremely painful action for our shareholders. I mean, you think so. So, I brought up the Dow Jones Industrial Average today, because again, I hear it constantly. I know we all talked about it, especially at stations and with our friends and definitely with us here as your advisors or for those listening here. And you've heard of our podcasts because of friends or colleagues at the station, you know, you hear this and you talk about the market. So, the Dow Jones Industrial Average has been referred to as the market, because it typically tracks the larger companies and really, it's a good indicator, not the only indicator to be fair, but a decent and good indicator of what's going on in the broader scheme of the United States, in particular, in the different industries. And again, it started as, and why it's still called the industrial averages because again, this index, one of the first started as tracking the industrial revolution. Because at that time in America, that was what was happening, that was the temperature gauge if you will, of America at the time. [14:42.1]

And to go back for a quick second again, just to give you a full picture, let's return to the original 12 companies that first made up the Dow Jones Industrial Average, in addition to General Electric. They were the American Cotton Oil company, the American Sugar company, the American Tobacco company, the Chicago Gas company, the Distilling and Cattle Feeding company, the Laclede Gas company, the National Lead company, yikes, the North American company, the Tennessee Coal Iron and Railroad company, US Leather company, and the United States Rubber company. Now all of these companies were involved in traditional heavy industry. In their day, they were the bluest of all blue-chip companies. But today the 30 components, as I mentioned earlier, that make up the Dow have little or nothing to do with heavy industry. So over time and the reason for this is the face of American business has changed a lot. And because of that, the Dow Jones, industrial average remains a great indicator of what's going on in the economy here in the US. Again, not the only indicator and by far not the only index anymore. There's plenty more that we have exposure to. So, having that diversified portfolio is something you hear me speak about constantly on this podcast, as well as within our client base is reasons, we have exposure to different areas of growth and value dividend paying, being on the value side, more growth oriented, getting that appreciation, that growth in other areas of the portfolio.

Also combining that with uncorrelated assets like fixed income or bonds, to make sure that we round out a good stability for protecting the downside, as well as the growth on the upside. And then all of that being tailored to fit where you are, whether you are 10 years on five years on, or you're about to drop enter at 25 years on and 50 years old, it all comes into play with understanding how you want your portfolio in your case, your deferred compensation plan or other assets of IROs, Roth that are out there and how it needs to work together? [16:41.2]

The Dow Jones Industrial Average is considered or referred to as the market, but it is not the overall market. So, understanding that and how that fits into your portfolio is important. If you haven't sat with that advisor, as I mentioned on this podcast, quite often find someone to build that trust in. If you haven't, you can give us a call. You can call us at (805) 409-8150. You can also go to our website at PensionAttention.com and you can schedule a time to meet with myself or my team here to again, sit down and figure out, okay, where's my defer compensation plan. Now, what do I want it to get to? And if you don't know what you feel like you want your deferred comp plan to get to, we'll be able to define that for you, with you, understanding your goals and objectives, understanding where your pension might be. Yes, we can forecast that through lafpp.com. So, we can do a lot of these tools that you have your exposure to be able to build this overall retirement plan for you. And for those of you listening, who got, let's say five years on hearing the word retirement plan may seem like, Oh man, Brad, I'll deal with that you know, years from now, talk to any one of your captains that are with me or anyone that works with an advisor. If they're doing it right, like we feel we are here, you will usually get the comment of why, man. I wish I had done this 10 years earlier. So, it's important to take that first step, make that call, make that first meeting it's important for your own future for no one else, right? Because again, I can sit here on this podcast and I can meet at stations as I usually done over 15 years and I can lead a horse to water. I can even do my best to make you thirsty, but I can't make you drink. [18:04.2]

So, it's for you, right? And again, if you want to give us a call, you can (805) 409-8150. Or again, you can go to the website and find out more information about me and the firm and set a time to review your overall plan, where you are. And again, if you haven't necessarily put a plan to go, that's okay. If you're participating in deferred comp plan and just started, that's okay. Get on the track to make sure that what you want to see for yourself 20, 25 years from now works for you in coordination with your pension and in coordination with your drop. Because one of the things I want to be very open about, and most of the guys I meet with that are going into retirement in their mid-fifties, that worked on the job for 25, 30 years are collecting their pension, we've got deferred comp on and drop dialed in. But have to remind you guys that you guys are still young and hopefully God willing the same amount of time you've had on the job you'll have in retirement. So, barring a national holiday. Okay. And you retire on a Friday, barring a national holiday on Monday. Markets are open. So, this goal, a lot of the guys talk about what I want between deferred comp plan and dropped half a million dollars. That's great, but starting Monday, we need to manage that portfolio because now instead of working for your money, you're having your money work for you. [19:11.1]

So, finding that trusted partner to again, partner with is really important because you want to have that trust in someone who knows the landscape of being a first responder in particular, knows your deferred comp instructor, knows how drop operates with regards to its tax components and the lump sum ability you're going to have to basically combine that with your deferred comp plan and then how your pension fits in. So again, looking at something that may seem like it's 20 years out really is a great fresh start. So again, you can go to our website at PensionAttention.com and set some time to review that as well. [19:41.8]

And before acting on anything discussed here today on this show, remember to speak with a financial advisor near you about your specific situation, or again, if you'd like our help, you can visit us at PensionAttention.com or give us a call at (805) 409-8150. I want to thank you for listening and I hope you enjoyed today's episode. If you did give us a like, leave a comment, let us know, it's always good to get feedback on either iTunes or Spotify, wherever you download your podcasts. And next week on Pension Attention, we're going to be going through the five questions that answer before you retire. These are five questions that I've put together and realize over almost 15 years now of working with specifically first responders and some of the questions that are really good to review prior to your guys' case, drop entering. I'm looking forward to it until then stay safe. [20:32.4]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [20:55.8]

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