Chances are you’ve heard of the Dow Jones, regardless of how much market knowledge you have. The Dow Jones Industrial Average is the oldest and best-known stock market index and has been around since 1896. But just because it has a long and rich history and is well-understood by most people, is it really the best measure of market health? CNBC recently published a simple yet informative video questioning the validity of using the Dow to capture the market. It’s a must-see!
First, A Recap
To summarize, the Dow Jones is composed of 30 of the most widely-known companies from a range of industries, such as Apple, Coca-Cola, and Nike. It is the most referenced index on television and newspapers and is often a barometer of investor sentiment. Its use is so common, that if you asked the average American “How did the market do today?” they will invariably quote you the Dow.
Why Should We Look Elsewhere?
The Dow has its strong points, but in reality, it’s impossible to represent the modern diversified market with so few stocks, especially when you look at the 500 companies represented by the S&P 500. Without getting too technical, the Dow is also price-weighted, meaning that it’s affected by changes in stock prices, not market value. So if a high-priced DJIA stock price drops, it will drastically affect the average. Finally, there are no set criteria for how companies are added or dropped from the Dow 30 list.
But despite the fact that it’s not the best standard of market health, it’s definitely the gold-standard in the financial world. In other words, it’s not going anywhere. But at 1on1financial, we look beyond the Dow and believe in helping our clients prepare for any market environment, taking risk tolerance into account and setting triggers for our client’s portfolios to determine when we should sell a particular investment. If you have any questions about how your portfolio is allocated and diversified or want a second opinion on your financial strategies, schedule a free 15-minute introductory phone call now!
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.