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Dow 20K...Now What?

January 25, 2017
Financial planning after Dow hits 20k.

After months on the brink, the Dow Jones Industrial Average ($DJI) finally broke through the 20,000 mark. What might it mean for you? Truthfully, not a whole lot. Let’s look back on the history of the index and then look at what some possible next steps for investors might be.

The DJIA was created by Charles Dow and Edward Jones, co-founders of the Wall Street Journal and Dow Jones & Company, in 1896 and it’s the second-oldest U.S. stock market index after the Dow Jones Transportation Average. When it was founded, the DJIA was comprised of 12 industrial and railroad companies. Today, the DJIA is now comprised of 30 large-cap, publicly-owned companies based in the United States. Companies are selected by editors of the Wall Street Journal and are typically only added if they have an excellent reputation, demonstrate sustained growth, and are of interest to a large number of investors. Two interesting facts about the DJIA are its components have only changed 51 times since its inception in 1896 and General Electric (GE) has had the longest continuous presence on the index. GE was also part of the initial 12 companies that comprised the index.

The index is weighted by price instead of market cap. That is why Goldman Sachs Inc (GS) is the biggest component of the DJIA at 8.04%, while Apple Inc (AAPL), one of the most valuable companies in the world, is only 4.13% of the index.   

Better than the DJIA?

The DJIA hitting 20,000 is a psychologically important mark, but nothing has fundamentally changed if the DJIA is at 19,999.99 or 20,000.01. The DJIA breaking through 20,000 became more significant when all three major U.S. indices, the DJIA, the NASDAQ Composite (COMP), and the S&P 500 (SPX) hit record highs yesterday. I tend to use the S&P 500 Index (SPX) to gauge market performance over the DJIA. The SPX is made up of 505 common stocks issued by 500 mid- and large-cap companies. The reason why there are more stocks than companies is because some companies, like Alphabet (GOOG, GOOGL), issue multiple classes of stock. It accounts for roughly 75-80% of the U.S. equities’ market value. In the past, the SPX has closely correlated with the Dow because Financials are a large component of both index. Financials comprise just under 15% of the SPX and 17.63% of the DJIA.

What Next

There’s tons of noise about Dow 20k in the news right now and it’s important to not let things like this distract you from your financial plan and goals. If you’re a more active TD Ameritrade client and want to monitor price levels of resistance and support you could setup alerts in thinkorswim®. If you don’t have time to actively manage your portfolio, but want to stay in the market, check out Essential Portfolios, a new automated investing solution offered by TD Ameritrade Investment Management, LLC.  

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