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Ask a Fool: The Dow Just Hit 23,000. What Does It Mean?

By Matthew Frankel, CFP® - Updated Nov 20, 2017 at 8:55PM

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Don't worry too much about the numbers -- just stick to a sound investment strategy.

Q: The Dow Jones Industrial Average just crossed 23,000. Does this mean stocks are getting expensive?

The Dow Jones Industrial Average is not only an arbitrary number, but it is a flawed indicator of how well the stock market is performing.

For starters, the index only considers 30 large stocks. Companies like Apple, Johnson & Johnson, and Microsoft are members. Between the NYSE and Nasdaq alone, there are more than 5,100 publicly traded companies, and the index only represents less than 1% of them.

Additionally, it is a price-weighted index, meaning that stocks with higher share prices matter more to the index's performance. This means that Goldman Sachs, which trades for about $242, has about six times the influence on the Dow as $40-per-share Intel, despite the fact that Intel is twice as large as Goldman Sachs in terms of market cap. In fact, it was a strong day by relatively high-priced Johnson & Johnson that caused the Dow to eclipse 23,000 for the first time.

The bottom line is that when the Dow (or any other index, for that matter) hits a milestone, take it with a grain of salt. There will always be some stocks that look cheap and some that look expensive, so it's still important to consider any potential stock investment on a case-by-case basis.

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