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March 30, 2012

Measuring our economy is not easy.

Many different statistics are available to measure the health of our economy. 
Stock indexes are often used to measure the health of the economy.  How do you decide which index to watch?  The Dow Jones Industrial index is frequently quoted in the media.  Many of the indexes are based on the price of the underlining securities.  Most of the indexes do not factor in dividends.  The results would be different if the dividends were reinvested and included in the calculation for subsequent periods.  The comparison to prior periods does not factor in inflation.

Since the introduction of the indexed mutual funds in 1976, the number of individuals investing in stocks has increased.  Could that impact the ability to compare the value of indexes to periods prior to 1976?

Indexes factor in the value of each company.  The weighting within the index varies among indexes.  Most give more weight to the larger companies.  Some indexes include an equal weighting of the underlying securities.  Other indexes give different weight to other factors.
 
GDP (gross domestic product) is another factor that people look at to see how the economy is doing.  GDP is the value of all the goods and services produced in the economy.
 
GDI (gross domestic income) is to total of all income received in the economy, Income includes: wages, interest, profits, etc. 

Some of the other factors considered to measure the health of the economy included: employment, residential housing, gas prices, etc.

Adding to the confusion is how the statistics are determined and the time it takes to release them.  Then there are also seasonal and other adjustments as more of the information becomes available. 

The more reports one reads, the more apparent it is that the best and brightest looking at the economy do not agree on where it is and where it is going.  Most investors should treat this information as static and not as information to react to.  Investing is a long-term process. 
 
Each investor must determine for themselves what they need to do to achieve their personal financial goals.  They must identify when the funds are needed, how comfortable they are with fluctuation in values, if they can tolerate a loss of value, and many other factors.  An approach should be developed that reflects the various factors.  The monitoring and adjusting for changing goals, etc. should be performed consistently over the long-term.      

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