The November rally in U.S. stocks pushed the Dow Jones Industrial Average (the Dow) past 19,000 for the first time. When the Dow reaches a new 1,000-point milestone it elicits headlines. And now the countdown to 20,000 is on — just a 5% return away.
Don’t place much value in these numbers, however. The Dow is made up of only 30 stocks and its members are selected by a committee with each stock’s contribution to the overall value determined by a complex calculation. The Dow is so heavily influenced by decisions of which stocks are included that it is not a very useful representation of U.S. stock market performance. Consider this: If IBM had not been replaced by AT&T in 1939, the Dow would now be over 40,000. (Read Dow Jones’s 22,000 Point Mistake for the full backstory.)
Over time, AT&T has come and gone from the Dow. This reflects its history of being broken up and rebuilt. On March 19, 2015, it was replaced in the Dow index by Apple. From March 19, 2015 through the end of November 2016, AT&T gained 16% and Apple declined by 14%. The Dow would already be near 20,000 if this change hadn’t been made.
Below, we elaborate further on the pitfalls of placing too much meaning in the value of an index. We suggest that you don’t try to glean insight from benchmarks that aren’t even all that relevant to your personal portfolio. Focus instead on evaluating what is required to improve the probability that you can fund your goals from a lifetime of savings and investing.
As we roll toward the close of 2016, be well and we hope you enjoy holiday festivities with friends and family.
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