Why you should care about that new Dow record
It's been a long time coming, and perhaps a cause for celebration.
But when it comes to your finances, the new record high for the Dow Jones industrial average will probably have zero impact. Most retirement or brokerage accounts will be unaffected.
The Dow index, a symbol of investor euphoria and despair for decades, climbed to a new high close on Tuesday -- 18,347.67.
It's taken over a year -- a long time in Dow terms -- but it's been a rocky one.
Since the last record on May 19 last year, the Dow has had to endure a sharp economic slowdown in China, a devaluation in that country's currency, slumping corporate earnings and, mostly recently, the vote by the Britain to leave the European Union.
Here is a look at the widely watched gauge, its venerable history stretching back over a century and why we still care about it after all these years.
WHAT IS THE DOW?
The index comprises 30 big company stocks chosen to represent a broad selection of industries. Its members include banks like Goldman Sachs and JPMorgan Chase, industrial giants like Caterpillar, the ubiquitous Apple, and media giant Walt Disney Co.
Its membership changes. When the predecessor to the Dow was first published on May 26, 1896, it included 12 businesses now long gone from the index, and in some cases memory. When was the last time you thought about American Cotton Oil or Laclede Gas Light Co.?
General Electric Co. is the only remaining original member. The industrial giant dropped out of the average for brief spells but returned for good in 1907.
HOW BIG IS THE NEW RECORD?
In relative terms, not much: It's just two-tenths of a percentage point above its previous all-time high.
And judging from recent history, it's taken its time. The last record was on May 19, 2015, fourteen months ago. In the six months leading up to that date, the index hit a record 10 times.
HOW DOES THE DOW DIFFER FROM THE S&P 500?
Whereas the Dow is made up of just 30 stocks, the Standard and Poor's comprises 500.
The two also differ in how they value each stock in their indexes. The Dow is price-weighted, which means the rise or fall of a single dollar in each of its 30 stocks has the same impact on the index.
That might sound fair, but the practical effect is that the index moves up and down regardless of whether the same dollar change in the price of two stocks represents a big or small percentage change for investors.
That's odd. After all, a $1 move in Cisco Systems, which traded Tuesday at $29.61, means a lot more to investors than a $1 move in 3M shares, which closed at $179.16.
By contrast, the S&P 500 is market weighted. Companies with biggest overall value on the stock market -- their stock price multiplied by all their shares-- have the biggest impact moving the index. Apple, the world's most valuable publicly traded company at $531 billion, moves that index more than any other member.
WHY DOESN'T THE DOW RECORD MATTER FOR MY PORTFOLIO?
Most index funds, a favorite of investors, are pegged to the S&P 500, not the Dow. Just over $2.1 trillion in index funds was tied to the S&P 500 at the end of last year, according to S&P Dow Jones Indices. That's nearly 60 times more than the $36 billion in index funds tied to the Dow.
Actively managed funds also tend to track the S&P 500: Another $5.4 trillion in assets is benchmarked against that index.
SO WHY SHOULD I CARE ABOUT THE DOW?
For all its flaws, the 30-member index closely tracks the performance of the S&P 500. Look no further than their performance since the start of the year: Both are up exactly the same amount, 5.29 percent.
What's more, the Dow is the most recognized five digits in the market and a great shorthand for how we feel about the market. So much of our mood about our investments seems to hang on it. When it's down, we're down. When it's up, we're up.
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