Typically, your investments will follow the performance of the stock market. You know the phrase, “rising tides lift all boats”? The same goes for lower tides. You can expect a similar pattern with your investments in relation to the Dow.
Think of it this way. When individual companies do well, the Dow does well. When companies do poorly, so does the Dow. Even intrigue and speculation can cause significant changes. Tiffany & Co. stock rose 32% after LVMH, a French luxury company, confirmed interest in acquiring it.
Then there are the unavoidable downswings in the stock market that cause your investments to drop. Let’s go over why your investments could experience a negative return when the Dow drops.
First, let’s define what is the Dow Jones Industrial Average (the Dow). The Dow is an index that measures the stock performance of 30 large U.S. companies. You might have heard of the S&P 500 index, too. That index measures the stock performance of 500 U.S. companies. The Dow focuses on the top 30. Among those companies include:
Regardless if you hold individual stocks with these companies, or own a mutual fund or index fund, you most likely hold stock in these companies if you invest.
The Dow was formed in 1896 to track economy changes and which companies influence those changes. Historically, the Dow has gone up over time. Year-to-date the Dow is currently up 16%. Take a look at the historical chart over the last 100 years.
As we experience changes in the economy, we can line up major events with the Dow’s performance. For example, the Great Depression between 1929 and 1932 shows a free fall in the stock market. And it dipped again during 1987’s Black Monday and the Great Recession in 2008.
When the Dow drops, your investments are worthless. You’ll likely see a decline in the value of your investments until the stock market shows a positive return. But just because you see a negative return doesn’t mean that you should sell the rest of your investments.
In fact, you should aim to do just the opposite. Stocks have been reduced in value as a result of a Dow drop, so this is an opportunity to scoop up some good deals.
For example, during the Great Recession in 2009, rather than selling off investments, you could have bought a Disney stock for roughly $30 per share. Today one share of Disney is worth more than $125.
Why does the Dow drop?
This all brings up another question: exactly why does the Dow drop? The short albeit vague answer: it varies. History has shown that various economic events, both nationally and worldwide, can impact the stock market.
Stock market downturns have happened because of events like 9/11 or crashes in international markets, like the China stock market crash in 2015. When major events happen, the stock market can react negatively or positively. The market is a constant ebb and flow. Pay attention to national and world events as they will most likely impact the Dow and other stock market indexes.
The best thing you can do when your investments take a hit is to do nothing. In order to win with investing, you must have a long-term strategy. History has proven that the Dow will bounce back in the event that it drops.
If you need your investment money for the short-term, you probably shouldn’t have it wrapped up in the stock market. Money for short-term goals should be placed in more conservative financial products, like a high-yield savings account or money market account.
Pros of investing in the Dow
If you want to invest in the Dow, you should follow the NASDAQ and the New York Stock Exchange. Those stock exchanges follow the performance of the Dow and could help you identify trends.
A pro of investing with the Dow is that you are invested in the 30 most influential companies in the U.S. These companies can shift how our economy grows. Another thing to note is that if you have interacted with these companies in the past, you have helped them grow.
If you buy Nike shoes, an Apple Watch, and buy groceries at Wal-Mart, you have helped these companies earn their spot on the Dow. And there’s no better type of company to invest in than a company you are already familiar with and buy from. You’ll most likely get that if you invest in companies on the Dow.
Cons of investing in the Dow
But don’t put all of your eggs in the Dow basket. This index isn’t the best indicator of stock market performance. In fact, you may be better off if you look at all publicly traded companies instead of the top 30. There are more than 3,700 publicly traded companies in the U.S., according to Bloomberg.
If your investments focus on just 30 companies, you may miss the opportunity to invest in other successful businesses. The S&P 500 is a better indicator of stock market performance since that index measures the success of the top 500 U.S. companies.
Where to invest besides the Dow
If you want to invest strategically, you must diversify your investments. A good idea would be to use an investing platform that pairs up your goals with a recommended investing strategy.
There are several ways to invest in the stock market, but we favor investing sites with minimal fees and easy-to-use dashboards.
You can open a retirement account through Wealthfront with a minimum of $500. Wealthfront’s platform invests in 11 global asset classes (stocks, bonds, real estate, etc.) so you can be sure your portfolio is diversified. So if you’re the type of person who prefers diversification with alternative investments, Wealthfront will be a good option for you.
Plus, Wealthfront charges only 0.25% in annual advisory fees – a steal among most robo-advisors.
Read our Wealthfront review.
Betterment also charges 0.25% in an annual management fee and has zero trading commissions. What’s better, there is no minimum balance to open an account which means you can get started right away.
Betterment allows you to invest in low-cost ETFs, which is why they’re able to keep costs down for you. Plus Betterment’s asset allocation includes small-, medium-, and large-cap value stocks in each portfolio.
Read our Betterment review.
Personal Capital is an aggregator and you’ll get to see all of your financial details in one place to track your net worth and monitor your cash flow. I happen to love their fee analyzer tool.
Personal Capital offers two different levels of membership: free and paid. The paid version offers financial advisory services to help take your investment portfolio to the next level you so desire.
Read our Personal Capital review.
Most people panic when the Dow drops. It’s a natural reaction. You’re terrified you’ll lose all the money you’ve invested over the years.
That’s why it’s important to 1. diversify your portfolio, so you don’t lose everything, and 2. wait out the bad times. Although there are dips in the Dow, history has shown us that it always goes back up again.
Look at investing as a long-term strategy, not a quick get-rich-quick scheme.
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