Why You Should NOT Pay Attention to “The Dow”

Just about every news channel, every financial web site, and every newspaper has the Dow Jones Industrial Average (DJIA) prominently displayed where you can easily view it. Further, people LOVE to talk about how the “Dow was up 500 points” or the “Dow was down 500 points.” The next time someone brings this up, ask them to explain what it means. I would love to hear their response!

The DJIA is an example of an index. In this case, it is a market cap weighted index of thirty large cap stocks chosen by a panel of experts as representative of the US economy. That’s a mouthful:

• Index
• Market cap weighted
• Large cap
• Panel of experts
• Representative of the US economy

Each of the above terms has precise meanings that, when combined, help you to understand the DJIA. More specifically, this combination describes what the DJIA is and is not.

Let’s spend a few minutes describing each of these in simple language:

• Index – A collection of securities
• Market cap weighted – The amount of each security included in the calculation of the index is dependent on the total value of all shares outstanding of that security. To simplify think of this as what it would cost to buy all shares of stock for a single company
• Large cap – BIG companies
• Panel of experts – I’m going to leave this one to your imagination. However, you might go with “Anyone 50 miles from home with a briefcase”—cynicism intended
• Representative of the US economy—Reflecting what goes in the USA but NOT the world

So, the DJIA speaks to the value of 30 big US companies. In my opinion, that is NOT the bell-weather indicator that I would recommend for gauging where things are headed! However, it does provide an easy way to communicate big numbers via the media with the goal of driving an emotional response in those who see/here this information.

Take a look at the attached article for additional information about this topic.

As always, thank you for sharing a bit of your time with us this Friday.

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 Enjoy the read and remember, it’s NOT about the money. It’s about how the money supports your goals!

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