The Dow Jones Industrial Average, usually shortened to The Dow, is one of the best-known proxies of the US stock market. While The Dow is still so popular, the DJIA is also considered outdated. It can help to learn a bit about the history so that you understand why it may not work the best anymore.
What it Does
The DJIA uses values calculated using formulas based on the lowest share price rather than other metrics and The Wall Street Journal dictates which companies are included in the DJIA.
Many myths surround The Dow Jones Industrial Average, such as a mathematical error that could have the Dow sitting at 30,000 instead of 20,000 or that if The Wall Street Journal moved IBM off the Dow, the DJIA would be much higher. However, even with all those flaws and issues, the Dow Jones Industrial Average has beaten the S&P 500 for many years.
The first issue is that the DJIA’s emphasis on nominal share prices means that it is irrational. The nominal stock price can be changed through stock splits, though history has shown that it doesn’t make much difference.
Investors can overcome this issue by building a portfolio that only contained companies in the DJIA, weigh them all equally, and then reinvest the dividends accordingly. You can do all this through EuropeFX Review Expert, giving you the benefit of having an online broker and plenty of information at your fingertips.
Another issue surrounding the Dow Jones Industrial Average is that it excludes many domestic equity markets and people believe the proxies are less than ideal. However, it doesn’t matter much for most because it has been a historically ‘good’ proxy, so focusing primarily on the DJIA through EuropeFX Review Expert should still help you build your wealth and portfolio.
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