The markets have been in focus recently due to the corona virus pandemic and its impact on the economy. There is much focus place on what the media outlets call the “Dow” and we wanted to take this opportunity to clarify “What is the Dow?”
The Dow Jones Industrial Average (DJIA), or Dow for short, is an index that tracks 30 large publicly traded companies that trade on the New York Stock Exchange (NYSE) and the NASDAQ. Yes, you read that right, this index tracks only 30 companies. Does following the ups and downs of the Dow make sense for you, your portfolio or the markets in general? I would argue that it simply gives you a good view of large companies and it is not a broad enough index to benchmark most portfolios that take a true asset allocation approach. We discussed it recently in our Mitlin Minute, What is the Dow?
Those that have a diversified portfolio will have exposure to assets that will not benchmark well against the Dow. As an example, companies in the small-cap, mid-cap and international markets will not be represented well by this index.
The Dow is a good indicator of how a small number of the largest publicly-traded companies are performing, but not of the broader markets as a whole. It is important to have appropriate benchmarks to compare your portfolio to and the Dow may provide that for a portion of your holdings, but not all of them. We use several benchmarks to compare portfolios and each one needs to be reviewed and compared to the holdings that are most like the benchmark, otherwise, it is meaningless data.
Make sure you understand how your portfolio is positioned and the best ways to benchmark how your assets are performing. The Dow has very little correlation with a portfolio that has a vast majority of assets not in large-cap companies and will not provide you with a good indication of how your portfolio is performing during bull or bear markets.
We would be happy to discuss your situation regarding the benchmarks being used to evaluate your portfolio and what indexes would be most relevant to you. Just contact us, Mitlin Financial, at (844) 4-MITLIN x12 to schedule a time for this review. Be sure to share this article with friends, family and business acquaintances who might be interested too. We look forward to helping you, and them, get on the right path and stay there.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
