Reason 4: The Dow has bad timing when its managers make changes.
The Dow doesn’t make many changes, but when it does, it has had some terrible timing. Among some of the worst examples were the decision to wait until after the financial crisis to replace Citigroup Inc. (NYSE:C) and GM, with GM on the brink of bankruptcy when it was replaced in June 2009. Similarly, American International Group Inc (NYSE:AIG) didn’t get replaced until September 2008, after it had already suffered huge losses in advance of its needing a massive federal bailout. On the other hand, the additions of Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC) in November 1999 corresponded almost perfectly with the high-water mark of the tech boom, with both companies suffering severe losses in the ensuing bear market.
Reason 5: The Dow leaves out international companies.
The Dow includes only U.S. companies. That made sense when the U.S. was the dominant capitalist economic power in the world, but with up-and-coming international markets catching up to the U.S., the Dow can no longer claim to track well with stock markets around the world. Although many of those companies have businesses with global scope, many foreign companies are world leaders in their industries, leaving the corresponding Dow component in that industry as an also-ran at best.
Go beyond the Dow
The Dow is a perfectly reasonable way to measure how some of the top companies in the U.S. are performing in the stock market. But as a reflection of the entire stock market, it falls woefully short. That’s why you shouldn’t obsess over the Dow’s every move, instead taking a big-picture perspective on the broader market.
The article 5 Reasons You Should Stop Obsessing Over the Dow originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns shares of Apple and warrants on Bank of America and AIG. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends AIG, Apple, General Motors, Google, and Intel and owns shares of AIG, Apple, Bank of America, Citigroup, Google, Intel, IBM, and Microsoft, and has options positions on AIG.
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