RadioBDC Logo
Coming Home | Kaiser Chiefs Listen Live
 
 
< Back to front page Text size +

Ignore the Dow?

Posted by Jill Boynton  April 26, 2010 10:45 AM

E-mail this article

Invalid E-mail address
Invalid E-mail address

Sending your article

If you listen to any TV news station you will hear the current day's market activity related in terms of the Dow Jones Industrial Index ("the Dow.") The Dow represents 30 of the largest public companies, but is it a good representation of the "market" and, more importantly, should you use it to guage the performance of your portfolio?

The companies that comprise the Dow are chosen by a committee. Some criticisms of this process include the argument that companies are added after they have experienced their prime growth period, and evidence shows that new Dow stocks lose, on average, 20 percent of their value in the first year of inclusion. In addition the index is weighted according to share price, thus stocks with a higher share price have a higher weighting in the index. A $1 change in value of a higher-priced stock counts more than a similar change in a lower-priced stock. Does this make the index a good proxy for the stock market in general? Most advisors think the S&P 500 Index or Wilshire 5000 Index make better benchmarks.

It is just as important to remember that if you have a diversified portfolio of stocks and bonds, no one market index is going to represent the activity in your portfolio for a given day. If you have 60 percent in large company stocks and 40 percent in bonds and you see that the Dow (or the S&P 500 Index) are down a point, it is likely that your portfolio changed by about 6/10 of that point. Add to the mix your bonds, small company and foreign stocks and you can see that the Dow or any other large company index is not a good illustration of your portfolio.

So watch the day-to-day changes of the Dow with mild interest, but don't take it as an indication of the performance of your portfolio.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

E-mail this article

Invalid E-mail address
Invalid E-mail address

Sending your article

ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

E-mail your question

Name:
E-mail:
Your question/comment:
archives