Overview: Many investors use the Dow Jones Industrial Average as a gauge of how the market is doing. It is important to recognize that the Dow only captures one portion of the market.

---

How did the market do today? When is the market going to get back to 14,000?

 

When investors talk about “the market,” they usually mean the Dow Jones Industrial Average. A well-educated investor recognizes that the Dow is a market, but it is not the market.

 

What is the Dow? The Dow is an index composed of 30 U.S. stocks chosen to indicate how the stock market is doing. The Dow does a good job of measuring the performance of one asset class — U.S. large-cap growth. The same could be said of the S&P 500 Index, which is composed of 500 of the largest U.S. companies. It is also commonly used to represent “the market.”

 

There are mathematical reasons why investors view the Dow as the market. Even though the Dow only tracks a small fraction of the companies in the market, those companies make up roughly 25 percent of the market. The S&P 500 provides about 75 percent coverage of U.S. equities.

 

However, solely considering the Dow (or the S&P 500) as the market can lead to a wrong view of performance. Just look at the past decade. The 10-year annualized return of the Dow was 1.3 percent, and it was –1.2 percent in real terms. So this was a decade of lost market returns, right?

 

Wrong! Consider the following table.

 

Annualized Returns (%) 2000–2009
U.S.	Returns (%)	International	Returns (%)
Large-Cap (Dow)	1.3	Large-Cap	1.2
Large-Cap (S&P 500)	–1.0	Large-Cap Value	3.5
Large-Cap Value	2.5	Small-Cap	4.3
Small-Cap	3.5	Small-Cap Value	11.6*
Small-Cap Value	8.3	Emerging Markets Large-Cap	9.8
Real Estate	10.7	Emerging Markets Small-Cap	10.9
		Emerging Markets Value	12.1