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  • What the heck is the DOW?

  • For many people, “the DOWis one of those terms that when you hear it on TV or read

  • it in an article, your eyes glaze over and your mind wanders to something more relevant

  • to your life, like whether you could fit 12 marshmallows in your mouth at once.

  • But how do you know you don't need to know what the DOW iswhen you don't know what

  • the DOW is?

  • [MUSIC]

  • In the late 19th century, a newspaper editor named Charles Dow and a statistician named

  • Edward Jones wanted to create a simple tool for how the U.S economy was doing day-to-day.

  • Since most of the economy was industrial at the time, they decided to combine the stock

  • prices of the twelve biggest industrial companies into one statistic: the Dow Jones Industrial

  • Average.

  • Those twelve companies were: American Cotton Oil Company, American Sugar Company, American

  • Tobacco Company, Chicago Gas Company, Distilling & Cattle Feeding Company, Laclede Gas Company,

  • National Lead Company, North American Company, Tennessee Coal, Iron and Railroad Company,

  • U.S. Leather Company, United States Rubber Company, and the only one still on the DOW

  • today: General Electric.

  • Today, 30 companies make up the DOW, and their combined share prices are used as an index,

  • or a benchmark, not just for how the stock market is performing in general, but also

  • how specific companies are performing compared to the market.

  • So, for instance, if you own a blue-chip stock that's holding steady while the DOW is going

  • down, you can say that your stock is outperforming the market.

  • But wait a minute. There's almost 4,000 companies being traded on the U.S. stock market.

  • How could just 30 provide a reliable snapshot, no matter how big they are?

  • That's a valid question.

  • Some people think the DOW's importance has been blown way out of proportion.

  • After all, these 30 companies can be doing well when most Americans are hurting, like

  • in the case of massive layoffs.

  • And, as you've probably already noticed, they do a LOT of business overseas, so their

  • share prices don't necessarily reflect the strength of the American economy.

  • So why do cable news hosts still endlessly refer to it as if it's the be-all end-all

  • of market measurement?

  • Well, the stock market's a funny thing.

  • Since its gains and losses are driven largely by whether people are deciding to buy or sell,

  • what's actually happening in the economy is less important than what people think is

  • happening.

  • An individual stockbroker is trying to guess what all the other stockbrokers are going

  • to do.

  • But all the other stockbrokers are thinking the exact same thing.

  • Each investor needs to watch the DOW simply because he or she knows that every other investor

  • is watching the DOW--the starting point of an endless guessing game that often leads

  • to overreactive bubbles and plunges.

  • Adam Davidson of the New York Times called the DOW ananxiety amplification device”.

  • So do you need to worry about the DOW?

  • Should you track it like a hawk, updating your 401(k) with every news story?

  • Or should you just ignore it?

  • Neither.

  • Knowing what the DOW isand isn't, will help protect you from the hysteria that can

  • dominate the news in times of worry.

  • But you should know that it's just one of many indicators of how things are going in

  • the U.S. economy - like GDP, employment numbers, and Treasury Interest Rates.

  • Maybe we should take a cue from the man who it's named for - Charles Dow was observed

  • to rarely look at the index himself.

  • And the executive director of Dow Jones Indexes, John Prestbo, recommended that the average

  • investor should only look at the index around once a quarter, or once a month at the very

  • most.

  • So the next time you hear someone on cable news yelling about the DOWnow that you

  • know what it is, you can probably go back to what you were doing.

  • And that's our two cents!

What the heck is the DOW?

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