Week of August 27, 2007

The Markets
 
Sometimes Wall Street has a short-term memory.

It was just a few short days ago on August 16th, that the Dow Jones Industrial Average hit an intra-day low of 12,455, which was an 11% drop from its July 19, 2007, all-time closing high 14,000, according to Yahoo! Finance.  Remember that?  Things were so tenuous in the credit markets that the Federal Reserve felt compelled to step in and add billions of dollars of liquidity to banking systems and to cut the discount rate.  However, with last week’s strong rally, the Dow closed last Friday just 4.4% below its all-time high.  And year-to-date, the Dow is up 7.4%, which is nothing to sneeze at.

Are all the problems that prompted the Fed to take action now behind us?  The short answer is nobody knows.  With all the exotic securities and new-fangled investments that have been sold in the past few years, it may take more time for the effects of subprime problems and liquidity issues to work their way through the system.  Then again, it’s possible that the Fed’s action was all that was needed to cure the problem.  Of course, we continue to monitor the situation.

Liquidity issues took a backseat last week as good economic news helped drive a nice rally in the stock market.  In particular, data on durable goods orders and new home sales were perceived positively by the markets, according to MarketWatch.

If you look at the performance numbers below and have no memory of the volatile times earlier this month, you’d think we’re having a great year in the stock market.  And looking at the one-year returns, it’s hard to argue that we’re not.          

Source: Yahoo! Finance, Barron’s Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

WILL TAKING A PERSONAL FINANCE CLASS IN HIGH SCHOOL help your child later in life?  According to a new study, your teenager may be better off selecting another elective.  Researchers at Ohio State found that adults who took a high school personal finance class didn’t score any better on a test of basic investment knowledge than those without a personal finance primer.  Interestingly, however, respondents who took a personal finance class in college scored more than a full point (or a letter grade in academic terms) higher than those who took a high school personal finance course.

Published in a recent issue of the Journal of Family and Economic Issues, the study involved 1,039 alumni of Ohio State.  So why would college classes be more effective than those in high school?  Study co-author Jonathan Fox, an associate professor of consumer sciences at Ohio State University, says college classes are more comprehensive and that personal finance lessons may be more applicable for college students who are living on their own, paying bills, and dealing with financial aid issues.

Additionally, with study respondents who held a bank account before age 18 scoring more than 5% higher than those who didn’t, Fox says the study underscores the value of real-life financial experiences as teaching tools.  Accordingly, he suggests the best way to convey the basics of personal finance to high school students might be to include real-world financial issues for teens in the curriculum.

There’s plenty of room for improvement when it comes to educating teens about personal finance. A 2006 survey measuring the financial knowledge of 12th graders conducted by the Jump$tart Coalition for Personal Financial Literacy found only 14.2% knew that stocks have historically, over long periods of time, returned more than bonds.

How do you teach your children about money?  Do you have tips you’d like to share?  Let us know.

Weekly Focus – Maturity Brings Richer Memories

Do you ever wonder why your 12 year-old can’t remember riding on the teacups with her cousins at Disneyland when she was five?  MIT neuroscientists may have the answer.  Researching how memory formation differs between children and adults, the scientists found that although the two groups are similar when it comes to constructing basic, factual memories, adults do a better job at remembering rich, contextual details.

According to the MIT press release, the MIT study, published in the August 5th advance online edition of Nature Neuroscience, indicates that a “more developed prefrontal cortex (PFC) -- an area of the brain associated with higher-order thinking, planning, and reasoning -- may be responsible for creating richer memories in adults.”

Quoted in the release, senior study author John Gabrieli of MIT’s McGovern Institute for Brain Research and Department of Cognitive Sciences explained, “Activation in the PFC follows an upward slope with age in contextual memories.  The older the subjects, the more powerful the activation in that area.  That makes sense, because there's been a convergence of evidence that the PFC develops later than other brain regions, both functionally and structurally.”

So, there are some advantages to growing older!

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.