DOW v. S&P

[Arkady]

I've always found it odd that when the mainstream media refers to the performance of stocks, they nearly always refer to the DOW, rather than some competing index like the S&P 500. There are two problems with this:

One, the DOW consists of only 30 companies. It's really just a measure of ultra-large-cap US corporations, which can diverge greatly from overall equities. The S&P 500 also just deals with large-cap US corporations, but it's many times broader.

Two, the DOW doesn't use a sensible indexing system. It's just a sum of the cost of the 30 stocks (divided by a divisor to account for stock splits, etc.) So, picture a simple index of just two stocks for corporations of the same size, one selling for $200/share and one selling for $20/share. Say the $200/share one rises 20% and the $20/share one rises 5%. Now they're selling for $240 and $21. So, the index will have risen from 220 to 261. That's a 18.6% increase in the index, when in fact the total market capitalization of the index only rose 12.5%. In essence, the DOW weights the index towards the higher-priced stocks, rather than proportional to the size of the company. This gives you a skewed view of stock performance. Other stock indexes, like the S&P 500, use sensible indexing systems that give you a real read on the average increase or decrease in value.

Anyway, today the S&P 500 hit an all-time high. It's a great time to be an investor.

 

[ITALIA]

I've always found it odd that when the mainstream media refers to the performance of stocks, they nearly always refer to the DOW, rather than some competing index like the S&P 500. There are two problems with this:

One, the DOW consists of only 30 companies. It's really just a measure of ultra-large-cap US corporations, which can diverge greatly from overall equities. The S&P 500 also just deals with large-cap US corporations, but it's many times broader.

Two, the DOW doesn't use a sensible indexing system. It's just a sum of the cost of the 30 stocks (divided by a divisor to account for stock splits, etc.) So, picture a simple index of just two stocks for corporations of the same size, one selling for $200/share and one selling for $20/share. Say the $200/share one rises 20% and the $20/share one rises 5%. Now they're selling for $240 and $21. So, the index will have risen from 220 to 261. That's a 18.6% increase in the index, when in fact the total market capitalization of the index only rose 12.5%. In essence, the DOW weights the index towards the higher-priced stocks, rather than proportional to the size of the company. This gives you a skewed view of stock performance. Other stock indexes, like the S&P 500, use sensible indexing systems that give you a real read on the average increase or decrease in value.

Anyway, today the S&P 500 hit an all-time high. It's a great time to be an investor.

I judge my portfolio return against the S&P 500 although I also have mid caps, small caps, foreign, growth and value in it.

 

[Arkady]

I judge my portfolio return against the S&P 500 although I also have mid caps, small caps, foreign, growth and value in it.

Me, too. However, I've simplified my portfolio in recent years. I used to have a pretty strong feeling about what would do well and what wouldn't. In the Bush years, I was counting on incompetence in leadership resulting in US stocks underperforming those of the rest of the world, so I mostly invested abroad, and it paid off very well. When Obama came in, I figured it would be a return to competence, and I mostly shifted back to domestic stocks, which once again paid off well. But as between various classes of US equities, much less as between various individual stocks, I really feel like I'm operating blind. It's not like a few years back when the constant panics were hitting over European credit markets, where it seemed smart to bet on large-cap value stocks, with the idea people would be fleeing to perceived safety. These days, I don't have a clue -- large or small, value or growth, one sector or another. So, much of my stock is just a Vanguard Total Stock Market ETF, which is as generic as you can get.

 

[ITALIA]

Me, too. However, I've simplified my portfolio in recent years. I used to have a pretty strong feeling about what would do well and what wouldn't. In the Bush years, I was counting on incompetence in leadership resulting in US stocks underperforming those of the rest of the world, so I mostly invested abroad, and it paid off very well. When Obama came in, I figured it would be a return to competence, and I mostly shifted back to domestic stocks, which once again paid off well. But as between various classes of US equities, much less as between various individual stocks, I really feel like I'm operating blind. It's not like a few years back when the constant panics were hitting over European credit markets, where it seemed smart to bet on large-cap value stocks, with the idea people would be fleeing to perceived safety. These days, I don't have a clue -- large or small, value or growth, one sector or another. So, much of my stock is just a Vanguard Total Stock Market ETF, which is as generic as you can get.

I'm in Vanguard too. That Total Stock Market ETF I just heard is taking in a lot of new money.

 

[as seen on tv]

on the basis of the fact that you're so often wrong, i take your "great time to be an investor" claim as an indication that market is likely to crash.

 

[ITALIA]

on the basis of the fact that you're so often wrong, i take your "great time to be an investor" claim as an indication that market is likely to crash.

On the basis of the fact that you're so often wrong,(lying) I take your claim that the market is not likely to crash.(maybe correct but no crash)