Gateway Financial Partners

No Way, No Dow

My wife Debbie and I still watch the evening news.  I know, we should just get instantaneous news from our Twitter feed like everyone else under 80 years old.  But I like Lester Holt.  Does your Twitter feed remind you to “take care of yourself, and each other” like Lester does? I think not.  But Lester still falls into the same trap as many other newscasters when reporting on financial news – he tells us about the Dow.

The Dow is the common nickname for the Dow Jones Industrial Average, one metric used to measure the ups and downs of the stock market.  But for a lot of reasons, it is not a very good measure and this is my official proposal to stop using it forever.

  1. Most people don’t really understand what the Dow is. It is simply an average of 30 large stocks listed on the US stock market, but which 30 stocks? It’s not the 30 largest stocks because Amazon isn’t included, nor are Berkshire Hathaway or Tesla or Exxon included even though they are all in the top 10.  Instead, it is a hand-picked group of stocks chosen by a committee in an attempt to represent the US economy.  If that sounds a bit squishy, it is….
  2. Talking about the absolute change in the Dow is not insightful. A typical news report will declare that the Dow was up 100 points today, or down 75 points yesterday.  But it makes no sense to talk about the Dow in terms of absolute change – is 75 points a big change or a small change?  The audience has no context for the magnitude.  The reporters should at the very least put the change into percentage terms that might be more meaningful.  But even then, the focus on the day-to-day fluctuations is still problematic.  It would be much more insightful to inform the public of how the market is doing over longer periods.
  3. The Dow is not a good indicator of the impact on people’s stock portfolios. There have been material differences over time between the performance of the Dow and the results from other stock market indexes such as the S&P 500, for instance.  One is not necessarily more accurate than the other, but the difference is that S&P 500 funds are a common holding in many portfolios, while I have yet to come across anyone who held the 30 stocks of the Dow.  As a result, it would be much more meaningful to most investors to tell them how the S&P 500 moved as a measure of stock market performance.

So, my suggestion is to tune Lester out when he talks about the stock market, especially when discussing the day-by-day results of the Dow.  Instead, keep focused on your long-term goals, and take care of yourself, and each other.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

 

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About the Author

Neil Manning
Neil Manning CFP, AIF, CDFA, FSA - LPL Financial Advisor
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014.  Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong).  For more details about my background, check out my website below.
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