Justin Lahart has a good piece in the Journal defending the use of the Dow. Following yesterday’s announcement about Apple’s inclusion in the index there were a number of comments amounting to “wait, why does anyone care about the Dow Jones Industrial Index?” I was among those people saying something similar. Justin showed that the Dow and the other widely cited US index of stocks, the S&P 500 have a very high correlation. He concludes:
Since 1950, the monthly change in the S&P 500 has had a 96% correlation with the Dow’s. What’s more, the magnitude of those changes closely match each other: A 1% monthly change in the Dow has been associated with a 1.03% change in the other index. There are differences between the two, but for investors looking for a daily yardstick of the market, they amount to fractions of an inch.
This is precisely why no one should care about the Dow. It is, at worst, an incomplete view of the performance of corporate America. And it is, at best, a redundant view of corporate America. There is simply no reason to track two indices that are near replicas of one another. But if you turn on financial TV, open the news paper or view a financial website you will inevitably see a box that shows the Dow, S&P 500 and the Nasdaq. This makes no sense. We live in a global economy now. Investors would be better served by seeing something like the S&P 500, Nasdaq & MSCI EAFE. Let’s ditch the redundancy with the US markets and move towards a more globally diversified view of the investment world. This will provide us with a better perspective of the broad performance of the (global) stock market.
It’s time to ditch the Dow.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.