"The Market Is Falling!"
Q: What does "the market" going up or down 100 points in a day mean to me? -- J.W., from the Internet
A: The quick answer to your question: not a whole heckuva lot, Fool.
Now bring along some snacks and bottled oxygen for the long-winded explanation ...
First you have to define "the market." A lot of people -- particularly those clean-shaven guys in suits on TV who devote all of two seconds to covering "the market" on the daily news -- are talking about the Dow Jones industrial average (DJIA).
But the Dow ventures to measure the performance of the overall stock market by using a group of only 30 American multinational conglomerates -- companies such as General Electric, Disney, Exxon, AT&T and General Motors. Although many of them may be big heavies of American industry, the Dow has been rightly criticized for being too stodgy. Just recently Dow Jones announced it is taking steps to make the index more representative of the American economy by kicking out some old-timers and bringing in Intel, Microsoft, SBC Communications and Home Depot.
Those are nice additions, but still the Dow is composed of only 30 stocks out of the 9,000-plus on the American exchanges. Many would say it's a misnomer to call the DJIA "the market." But if you did, what would a drop of 100 points in a day mean for the Dow and for you?
Not much, even if you were invested in all 30 Dow companies. With the Dow hovering around 10,000 these days, a 100-point drop is only a 1 percent decline. Stocks, in general, are volatile and will swing in much larger percentages than that on a daily basis. That's why we Fools buy and hold and try not to pay attention to the daily noise of the market.
Even 200-point moves are not uncommon for the Dow on any given day. Yet if you listen to the cable business channel, you might think something big was happening. The broadcasters seem to be caught in a time warp. They're still measuring Dow movements by points rather than percentages. Decades ago, when the DJIA was around 1,000, a 100-point (10 percent) or 200-point (20 percent) drop would be a lot more nerve-wracking than today.
We've seen unprecedented growth of the stock market in our recent history. From January 1995 to today, the Dow's grown from 4,000 to 10,000 (earlier this year, it was more than 11,000). We'd need a full 1,000-point drop in one day for the Dow to lose 10 percent of its value.
Beyond that is the question of whether or not the DJIA really represents "the market." We Fools usually measure the market by the Standard & Poor's 500. The S&P is made up of 500 of the largest, most successful companies in the United States. It's a broader index. There are other ways of measuring the market, too. The Wilshire 5000, for example, measures all the listed stocks (yep, there's more than 5,000, but someone must have been enamored of the name and stuck with it).
So, whenever people ask you what the market did today, ask them what market they're talking about. And if some talking head is squawking on the tube about the sky falling because the Dow is down 100 points, be cool, Fool. Don't listen to all the noise.
WHAT NOW? One way to invest in the Dow and attempt to beat its average return is the Fool Four approach. Check it out at the Fool's Dow area.
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