NEW YORK – 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.
The index is comprised of 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.
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.
By contrast, the S&P 500 is market weighted. Companies with the biggest overall value on the stock market – their stock price multiplied by all their shares – have the biggest impact on moving the index. Apple, the world’s most valuable publicly traded company at $531 billion, moves that index more than any other member.
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.
