Shortly after opening bell this morning, the Dow Jones eclipsed the 20,000 level for the first time since its inception in 1896. Certainly a milestone event— especially for an index with 120-years of history— the media is calling for celebration, jubilation, and exaltation. Take a minute, bask in the historic moment, but don’t stay there too long. The Dow, price-weighted and made up of just 30 stocks, is increasingly considered a more symbolic rather than practical index and not the best gauge of market performance available to investors.
The Dow Jones is, in a word, peculiar. As David Floyd a reporter at Investopedia explains, if Charles Dow (the founder of the Dow Jones) had in 1896 “kidnapped every mathematician east of the Mississippi, he could not have begun to match the computing power you command when you get bored and fiddle with your cell phone.” The price-weighted nature of the Dow also means that it sometimes moves in the opposite direction of the S&P 500, a market cap-weighted index. Take Dec. 1st for example, the Dow gained .36% while the S&P 500 fell .25%. To better explain, unlike the S&P 500, the Dow is not represented by pivotal, modern companies like Google, Amazon, or even Berkshire Hathaway.
That’s not to take away from recent stock market gains, likely a product of anticipated improvement in domestic growth. So celebrate today, just don’t let your glasses get too rosy. Investing is best done when emotion is left at the door. At Russell Capital, we take a practical and analytical approach to your portfolios so that we can help protect against volatility when it occurs while still aiming to meet your financial goals.