The Dow is up, down, sideways?!

Time and again you hear on the radio or TV, the market is up 100 points, down 250, “hitting a ceiling at 13000″, or some other jargon — what does all this mean and should it mean anything to you?

Often the media refers to the Dow Jones Industrials Index when they refer to the stock market. I think this is very misleading, and serves their interests better than it serves the general public. Here’s why:

The “Dow” is a price weighted list of 30 arbitrarily chosen stocks that are supposed to represent the stock market. This price weighting means that McDonald’s has more influence on the index movements (recent price $56.05) than Microsoft (recent price $27.84) — even though Microsoft is a $265 billion dollar company and McDonald’s is a $67 billion dollar company by market cap. Strange isn’t it? There are several other problems with the index cited in this paper.

The index itself is very easy to calculate at various times throughout the day. This is why radio and TV loves it so much - it’s a catchy story to tell about the minute by minute changes in the “market”.

When the Dow Industrials Index was created over a hundred years ago it may have provided a good representation of market performance. Now that many investors have globally diversified portfolios in investments of various weights and market capitalizations — and are interested in total returns, the Dow should no longer be the benchmark of choice.