Expert: Paul Henneman - 4/13/2010

Question
Hello, I was hoping to fit two questions into one here, since they are both quick and simple. Thanks a lot.

1) The dow is a collective index of companies, and I assume that  when the dow rises or falls it is based off the average changes of all those companies performances combined, my question. Does this mean that if you bought one share in every company indexed in the dow, would your portfolio rise and fall exactally the same as what the dow shows daily?

2) I see these "robot" anaylizing investment software programs that supposedly you just put money into it and it makes smart choices for you, would you reccomend using one of these, if so which one?

Answer
Mike,
  thanks for your question!
Yes, you are for the most part correct about the dow index. However, the index is adjusted for things like stock splits, substitutions, and other adjustments. The exact computation has become quite complex.

Here are some links to more information directly on the Dow Jones website. The second link describes very specifically the calculations of the Dow Index:
http://www.djaverages.com/?view=industrial&page=overview
http://www.djaverages.com/?view=industrial&page=calculation

This type of software can be helpful, but you do have to be very careful. There are two main problems to evaluation: First, most of these types of software have been created to earn profits for the company, have excellent marketing programs to really convince you they have a great service, but offer no benefit to the investor. The second problem is that an automated system can work well in most trading conditions. But, if something strange happens such as the huge market pull back in the last few years, it can ruin many automated trading programs efficiency. Most research indicates that you can expect something 'abnormal' to occur in the market every couple of years, so if the trading program can't handle it, you can really end up in a bad spot.
That said however, some are good.  I would not feel comfortably recommending a specific one to you, and I would also never suggest using a truly automated program that actually trades your funds. Instead, I would recommend looking at research providers, and act on their research, but place the trades directly. If you turn everything over to a software program where it can run the analysis of what stocks to trade, then actually place the trades with no input from you, things can run away pretty quickly.
Successful investing is difficult, which is exactly why not everyone can do it. Using outside research is a good thing, but you have to put in your time. In depth reading and learning about potential ways to invest is the only way to see long term success. Even then there will always be short term setbacks, but at least you are in control.
My own company produces buy/hold/sell recommendations and forecasted target prices on over 4000 stocks. You are welcome to take a look at www.ValuEngine.com  and sign up for the free weekly newsletter.
I hope that this helps, please do not hesitate to follow up with me if I can provide anything further, and I wish you the best!

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com